Where (in order to reflect the resulting increased credit worthiness of the borrower) the interest on a loan decreases as the ratio of debt to EBITDA of the Canadian borrower decreases, such interest will not be considered to be participating debt interest. CRA stated:
"Participating debt interest" as defined in subsection 212(3) of the Act is, very generally speaking, interest that depends on the success of the payer's business or investments. ...
In ... 2005-0161521R3 ... the interest payable was referenced to, inter alia, an applicable margin based on the borrower's total leverage ratio. We ruled favourably because the extra amounts payable simply used EBITDA as a tool to assess creditworthiness. As the borrower became more profitable, its payments decreased, and, in our view, this reflected the opposite of participating debt. Today, we are of the same view, and, generally, where the interest rate is capped and any reduction thereto would be intended as a reflection of the creditworthiness of the borrower, the interest would not constitute "participating debt interest" within