CRA states that interest that can increase with commodity price is not participating debt interest until this occurs
A term loan borrowing of Canco (containing a gross-up clause) provided for the payment of regular interest, together with the payment of additional amounts (also calculated as a percentage of the principal outstanding) if a commodity price exceeded a specified level (with the percentage rate for the additional amounts increasing in a stair step manner as the commodity price increased above further specified thresholds). CRA ruled that each payment of regular interest was not participating debt interest as defined in s. 212(3) until such time as the additional amounts became payable as a result of the commodity price condition having been triggered. CRA’s reasoning was that the only interest referenced in this definition was interest that was “paid or payable” – so that the contingent interest could be ignored until it became payable by virtue of the occurrence of the price trigger.
Somewhat oddly, CRA went on to indicate that once this triggering event had occurred, all regular interest paid thereafter would be tainted - even apparently if the commodity price went back down again.
This ruling apparently was all that Canco sought, so that there were no comments on the application of the relevant Treaty.
Neal Armstrong. Summary of 2016 Ruling 2016-0664041R3 under s. 212(3) - participating debt interest.