A CRA ruling contemplates that interest which the issuer can elect not to pay is interest for Part XIII but not s. 20(1)(c) purposes

A public company (ACo) will issue unsecured subordinated Notes, whose terms will be conventional except that:

• ACo may in its discretion elect by notice in writing to cancel the payment of the interest coupons on a going-forward basis, but recognizing that it thereupon loses its right to pay dividends (or the equivalent such as share repurchases) until it recommences interest payments.
• On the occurrence of a specified event (presumably, some sort of financial difficulty), the Notes will be converted into a number of common shares based on a formula-determined conversion ratio (such that the shares' value could be well below that of the converted principal amount).

The Ruling “Additional Information” states:

The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.

CRA then ruled that the Interest amounts paid to an arm’s length Noteholder will not be subject to Part XIII tax under s. 212(1)(b). Thus, CRA accepted that the Interest on the Notes was interest, but perhaps did not consider that the Interest was paid “pursuant to a legal obligation to pay interest” as required under s. 20(1)(c).

Neal Armstrong. Summary of 2018 Ruling 2017-0732001R3 under s. 212(1)(b).