CRA found that the covenant of the assuming debtor to pay accrued interest on a debt assumption was a payment in kind subject to Part XIII tax
As part of the consideration for the drop-down of the assets of a Canadian partnership (whose partners were Canco and its wholly-owned Canadian subsidiary) to a wholly-owned U.S. subsidiary (“Debtor Affiliate”), Debtor Affiliate assumed the loan including accrued interest thereon that had been owing by Partnership to another Partnership subsidiary (“Creditor Affiliate”), and Creditor Affiliate released the Partnership from its obligations under the Loan.
The Rulings Directorate indicated that this transaction likely entailed a novation of the loan, and that Part XIII tax thereby applied under s. 212(1)(b) and s. 212(13.1)(a) at that time on the amount of the accrued interest on the basis that:
[A]t the time of this novation, the Partnership would be considered to have made a payment or credit in kind of the Accrued Interest to the Creditor Affiliate by delivering the Debtor Affiliate’s covenant to make the payments under the Loan agreement to the Creditor Affiliate.
Neal Armstrong. Summary of 13 July 2018 Internal T.I. 2017-0713301I7 under s. 212(1)(b).