CRA rules and opines that deemed (s. 214(7)) interest on the conversion or sale of a convertible debenture is not participating debt interest

A 2012 ruling letter (2011-0418721R3) ruled that the interest coupons on a U.S.-dollar convertible note (whose terms were "plain vanilla" except that the issuer had the option to satisfy a conversion request by paying cash, and there is no period prior to maturity during which there is an unfettered right to convert) were not participating debt interest, so that the interest coupons paid to an arm’s length note purchaser (ACO) would not be subject to Part XIII tax. An amendment to this ruling letter now provides that "any" amount deemed under s. 214(7) to be a payment of interest on conversion of the Note by ACO also will not be subject to Part XIII tax.

Furthermore, CRA opined that on a sale of the note by ACO to an arm’s length Canadian-resident purchaser for cash "any amount deemed to be a payment of interest…. under subsection 214(7) would not in general constitute ‘participating debt interest’." (This presumably was given only as an opinion as such a purchaser has not been lined up.)

Neal Armstrong. Summary of 2012 Ruling 2011-0418721R3, as amended by 2014-0532411R3, under s. 212(3) – participating interest.