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.
Please note that the following document, although believed
to be correct at the time of issue, may not represent the
current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether 214(7) deems a participation payment to be
interest for purposes of the postamble to 212(1)(b)
Position TAKEN:
A determination of whether the participation payment is
interest can only be made after a review of the
supporting documentation
Even if it is not interest, it may still be caught by
the postamble to 212(1)(b)
Reasons FOR POSITION TAKEN:
We would need to determine if the stipulated interest
rate was commercially reasonable 212(1) applies to
payments and payments in lieu of interest
XXXXXXXXXX 940290
Attention: XXXXXXXXXX
April 15, 1994
Dear Sirs:
This is in reply to your letter of January 31, 1994, wherein you requested a technical interpretation of the postamble to
paragraph 212(1)(b) of the Income Tax Act (the"Act") and subsections 214(7), 214(8) and 214(14) of the Act.
The situation you describes concerns a debt obligation issued by a corporation resident in Canada to non-resident persons with whom the issuer deals at arm's length. The debt obligation bears a stipulated fixed interest rate and further obliges the issuer, at maturity, to pay a participation payment computed by reference to any increase in the price of a specific commodity. You ask that we assume that the participation payment is not interest under general legal principles and is not deemed to be interest under any provision of the Act unless subsection 214(7) thereof applies.
The determination of whether a participation payment would be considered as interest for purposes of the postamble to
paragraph 212(1)(b) of the Act can only be made after a review of the specific facts and supporting documentation.
In particular, we would need to consider whether the stipulated interest rate is commercially reasonable and whether the participation payment represents a repayment of the principal amount of the debt obligation. In this regard we note that paragraph 212(1)(b) of the Act is applicable in respect of a payment of interest as well as a payment in lieu of a payment of interest. Consequently, notwithstanding that the participation payment is not interest under legal principles, it may still be subject to the provisions of the aforenoted paragraph.
The above comments are an expression of opinion and as noted in Information Circular 70-6R2 are not binding on the
Department.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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