| 19(1) | File No. 5-8284 |
| Blair P. Dwyer | |
| (613) 957-2744 |
August 8, 1989
19(1)
Re: Participating Loan Arrangements
Thank you for your letter dated June 21, 1989, in which you expressed comments about a talk on the above-noted topic given by Mr. Brian Darling of this office during the 1989 Corporate Management Tax Conference.
You are concerned that the views expressed by Mr.Darling are at variance with the closing language of paragraph 212(1)(b) of the Income Tax Act (Canada) (the "Act"). This provision provides that, for certain purposes, interest shall not be treated as interest if all or any portion of the interest (i) is contingent or dependent upon the use of or production from property or (ii) is computed by reference to cash flow or other specified criteria.
We believe that Mr. Darling's comments are consistent with the closing words of paragraph 212(1)(b). Mr. Darling specifically acknowledged that payments ("Participating Payments") computed by reference to criteria such as cash flow do qualify as interest in the circumstances outlined in his talk. However, while the Department recognizes that Participating Payments coming within the closing words of paragraph 212(1)(b) may qualify as interest in certain circumstances, this does not mean that all such payments necessarily so qualify.
You also commented on the definition of the term "interest" in Canada's various income tax treaties. As you know, the definition of a term used in an income tax treaty affects the interpretation of the Act only insofar as the treaty provisions apply to the taxpayers in question. The use of a definition clause in a document indicates that a special meaning is being given to the term being defined. If the document wished to use the standard meaning of the word, a special definition clause would presumably not be necessary. Accordingly, the specific inclusion of Participating Payments in treaty definitions of interest does not extend the ordinary meaning of "interest" for non-treaty purposes.
We trust that this letter addresses your concerns. Once again, we thank you for taking the time to express your comments on Mr. Darling's remarks.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch