11 June 1992 Income Tax Severed Letter 9214010 - Participating Debt

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.

1992 Corporate Management Tax Conference

PAYMENTS UNDER A PARTICIPATING LOAN
PARAGRAPH 20(1)(c)

Question 1

At the 1989 Corporate Management Tax Conference, "Creative Tax Planning for Real Estate Transactions - Beyond Tax Reform and Into the 1990's", the Department stated that payments made under a participating loan are deductible as interest under paragraph 20(1)(c) where the investment exhibits the characteristics of debt rather than equity. The Department then went on to state that a participation payment will be considered to be interest provided that:

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

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

• • no other facts indicate the presence of an equity investment.

Does the Department continue to apply the same criteria to determine whether or not participation payments are deductible in accordance with paragraph 20(1)(c)?

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Department's Position

Yes. The criteria used to determine whether a participation payment will be considered to be interest remain unchanged from those stated at the 1989 Corporate Management Tax Conference.

Prepared by: Allan Nelson
June 11, 1992

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