Loan terms
Canco will borrow funds from an arm’s length lender resident in a Treaty country under a term loan (the “Loan”) with required periodic principal repayments. The Loan Agreement (which contains a gross-up clause provides for the payment of regular “Periodic Interest”, which will be equal to a “Quoted Rate” for specified types of deposits at the commencement of each interest period plus a specified number of basis points. In addition, if at the end of any “Additional Payment Period” (of a specified number of months), the trailing average of the reference commodity exceeds the specified trigger price, an “Additional Payment” calculated by applying the “Applicable Rate” for that period to the outstanding principal at the start of that period, will be required to be made. The Applicable Rate is a minimum of X%, and increases in specified increments as the reference price crosses specified thresholds. The proceeds will be lent by Canco to its subsidiary to fund work on a project, and will be secured by property of Canco in addition to property of the subsidiary. Canco also may be required to prepay the loan if the reference price exceeds specified levels.
Ruling
S. 212(1)(b)(ii) will not apply to any payment of Periodic Interest provided that at the time of payment no Additional Payment had become payable by Canco at or before that time as a result of the trigger date therefor having occurred - and once such Trigger Date has occurred such that an Additional Payment is paid or becomes payable on the Loan, all subsequent payments of Periodic Interest will be subject to Part XIII withholding tax.
CRA reasons (in its summary)
The definition of a "participating debt interest" refers to interest "that is paid or payable on an obligation, all or any portion of which …". Since a contingent amount would not be considered "payable," until an additional payment is paid or becomes payable, the periodic interest would not be considered participating debt interest. However, once an additional payment is paid or becomes payable, the periodic interest on such obligation would be considered participating debt interest from that point of time onwards.