Unsecured notes of Canco carry a fixed rate of interest, have a term of up to 60 years and upon the occurrence of default by reason of Canco's insolvency or bankruptcy, automatically rank equally with preferred stock. Would the interest be deductible? After stating that “absent a sham or a specific provision of the Act to the contrary, legal relationships are respected,” CRA stated:
the determination of whether the terms of the notes, including the preferred stock ranking clause, would prevent interest on the notes from being deductible under paragraph 20(1)(c) of the Act can only be made in the context of an advance income tax ruling request.