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.
DECISION SUMMARY
Subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act") Paragraph 20(1)(c) of the ActSubject: Compensation for borrowed money
- Whether compensation that varies with the debtor's profits is interest within the legal meaning of that term.
PROBLEM:
In the course of the refinancing of a company's business, it is proposed to change the terms of certain promissory notes held by various creditors: instead of a fixed interest rate of 13%, said notes will bear interest at 6.5% with an additional amount to be payable annually, the quantum of which will depend on the company's profits for that year. This contingent amount will be equal to 1% of the principal amount of the note for each $10 million (U.S.) of net income of the company. The terms of the note will stipulate that the aggregate of the basic and contingent interest will not exceed a rate of 12% per annum.
POSITION:
XXX
COMMENTS:
Given the 12% limit on the amount of interest payable on a note, the correct view is that the lenders are not sharing in the debtor's profits. Rather, the profits are used simply as a measure of ability to pay in order to determine the amount of interest that can be afforded by the debtor in a given year.
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