2016-0664041R3 dealt with a term loan which included both periodic non-participating interest payments, as well as future additional payments (the “Additional Amounts”) that were contingent on the index price of a particular commodity, and ruled that the former were not “participating debt interest” if, at or before the time of each payment thereof, no Additional Amount had been paid or become payable – but that all payments of periodic non-participating interest would be considered to be “participating debt interest” subject to withholding tax once an Additional Amount was paid or became payable.
Unlike the definition in the Act of “participating debt interest,” which refers to an interest payment “... all or any portion of which interest is contingent or dependent...”, the Canada-US Treaty definition of contingent interest in Art. XI(6)(b) does not include the “all or any portion” language. Would the payments of periodic non-participating interest made after the payment of an Additional Amount be relieved from Part XIII withholding tax under the Treaty?
CRA indicated that the position in the ruling was that each periodic payment of non-participating interest will be participating debt interest subject to Part XIII tax if, at the same time, an additional amount becomes paid or is payable. However, U.S. residents may generally be exempted from Part XIII tax by virtue of Art. XI(1) if the interest is not contingent interest under Art. XI(6)(b).
Whether an interest amount is subject to Art. XI(6)(b) is determined for each amount of interest that is paid or credited. The fact that an amount of interest previously paid was subject to Art. XI(6)(b) does not, by itself, mean that all future interest payments will be subject to Art. XI(6)(b).