19 June 1989 External T.I. 57990 F - Participating Loans

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

June 19, 1989

19(1)

Re:  Participating Loans

This is in reply to your letter dated April 27, 1989, in which you requested our comments on the deductibility of payments made under a participating loan arrangement.

As a general rule, the Department will consider a participation payment to be interest if

a)     the payment is limited to a stated percentage of the principal;

b)     the limiting percentage reflects commercial interest rates prevailing between arm's length parties at the time the loan is entered into; and

c)     no factors indicate that the "lender" is making an equity investment in the "borrower".

Whether a specific type of participation payment meets the above criteria will depend on all the surrounding facts and circumstances.  A lender's right to participate in profits realized by the sale of property by the borrower on the sale of property may indicate that the lender is making an equity investment in the borrower.  If so, the distribution of profits would not qualify as interest, even of the payment were limited to a fixed percentage of the principal amount.  Given the variety of participating loan arrangements that can be entered into, we are unable to provide a more detailed response in the context of a general inquiry.

While the Department briefly discussed participating loans during the 1988 Revenue Canada Round Table, its comments were restricted to participation payments based on cash flow, revenue or profit of the borrower.  Those general comments should not be taken as applying to all forms of participation payments.

As was the case with the comments made during the 1988 Round Table, the comments made in this letter are purely of a general nature and do not take into account considerations that might arise in the context of a specific transaction or event.  In particular, the comments do not constitute advance income tax rulings and consequently are not binding on the Department.

Yours truly,

for Director Financial Industries DivisionRulings Directorate