CRA rules that a negative participation make-whole is not participating debt interest

CRA has ruled that a convertible debenture on which interest was payable in shares or cash did not give rise to participating debt interest, or to interest withholding to an arm’s length holder.

On conversion, a holder was entitled to receive a make-whole (generally payable in shares) computed as the value of foregone future interest but reduced by a percentage of the gain enjoyed by the holder on conversion – so that in a sense it had a negative participation feature. CRA also effectively ruled that the make-whole was not participating interest.

Neal Armstrong. Summary of 2014 Ruling 2013-0514551R3, amended by 2014-0536001R3 under s. 212(3) - participating debt interest.