CRA seemingly indicates that contingent interest under Art. XI(6)(b) of the US Treaty does not taint any contemporaneous fixed interest

2016-0664041R3 found that a term loan with fixed periodic interest plus contingent interest that was payable only when a commodity price was above a specified (and not yet achieved) level would not be considered to be paying participating interest if no contingent interest had yet become payable. CRA was essentially asked whether this turned on the reference in the “participating debt interest” definition to “all or any portion” of the interest being contingent or dependent – so that such interest could still be exempted under the Canada-U.S. Treaty, whose definition of (non-exempted) contingent interest in Art. XI(6)(b) did not have the “all or any portion” language.

The CRA oral response (which appeared to use the word “amount” to reference each applicable interest component, rather than the aggregate interest amount, made on each payment date) was ambiguous, but seemed to imply that the different Treaty language did indeed matter, so that on each payment date, the fixed interest “amount” could be exempt even if there was also a contingent interest amount paid on that date that was not exempt.

Neal Armstrong. Summary of 15 May 2019 IFA Roundtable, Q.3 under Treaties – Income Tax Conventions – Art. 11.