CRA rules that a note whose repayment obligation is 100% linked to a commodity does not bear participating debt interest

ACo will issue senior unsecured notes for 100% of their principal amount and bearing an annual coupon of a stipulated percentage of the principal. On maturity, the amount paid (the “Final Redemption Amount “) will equal the product of the principal amount, and an index reflecting the price performance of the specified underlying commodity between a date shortly before the issue date, and a date shortly before the maturity. The Final Redemption Amount will be payable in cash unless a Noteholder timely elects for physical settlement. A calculated early redemption amount is payable on default or certain other events. ACo will likely hedge its exposure under the notes through options.

CRA ruled that s. 212(1)(b)(ii) (which imposes withholding tax on participating debt interest) will not apply to any payments of the interest coupons or to any payments on maturity or earlier redemption. The rationale stated in the CRA headnote is that:

The commodity is not sufficiently linked to the profitability of the issuer’s business.

No interest deductibility ruling was requested, but CRA presumably accepted that the notes were debt.

Neal Armstrong. Summary of 2018 Ruling 2018-0766771R3 under s. 212(3) – participating debt interest.