4 June 1991 Internal T.I. 910959 F - Participating Interest Feature

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.

This is in reply to your letter of April 4, 1991 wherein you requested additional comments on a participating interest feature to those already provided in our letter to you of March 26, 1991 ("Our Letter").  As stated in Our Letter, the participating interest issue was discussed in the 1989 Corporate Management Tax Conference and can be found on pages 8:9 to 8:11 of that conference report.  Since the conference report discussed the issue in some detail, we did not provide any further comments in Our Letter. However, we can provide you with the following general comments relating to this feature and its impact on section 237.1, subsections 96(2.2), 245(4) and 245(5) and Regulation 231(6).

Our Comments

If the participating interest is considered as a distribution of profits, then the interest payment by a taxpayer is not a deductible expense.  If the participating interest is considered as an expense of doing business, then the interest payment by a taxpayer may be considered as a deductible expense.  If on the facts of a particular participating interest feature, it is reasonable to expect that no "interest" would be paid over the term of the loan, the comments in Our Letter on the non-interest bearing loan would be equally applicable here.  Similarly, if the circumstances of the situation can be considered to have normal commercial terms, is not guaranteed by the general partner or the partnership and the "lender" has full recourse, the at-risk amount would not be reduced and its features would not be considered to be a prescribed benefit.  We would not see the deductibility of the participating interest feature as a relevant factor in these determinations.

The other comments in Our Letter appear to be equally applicable to a arrangement with a participating loan feature.

These comments represent our opinion of the law as it applies generally.  As indicated in paragraph 21 of the Information Circular 70-6R2, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch