Rick Campbell (613) 593-6937
Attention XXXX
May 15, 1984
Dear XXXX
This is in answer to your letter of February 3, 1984 enquiring about the deductibility of a ceiling rate guarantee fee paid under a "ceiling interest rate agreement". We can offer a general opinion however, it could change depending on the facts in an actual situation. A request for an advance income tax ruling might be appropriate for a taxpayer contemplating entering into one of these agreements.
The situation as we understand it is as follows:
A typical "ceiling interest rate agreement" would involve a Canadian corporate borrower entering into an agreement with an arms-length party, the guarantor, to pay an up-front fee in order to have a cap placed on the interest rate payable by the corporation on either existing variable rate debt or in the course of borrowing additional variable rate funds. The term of the protection period would be up to thirty-six (36) months.
We assume the "reference rate" mentioned below would not be lower than the current market interest rate at the time of a borrowing.
At the outset of the agreement, the parties would agree upon a "reference rate". The "reference rate" would be the interest rate used to calculate any interest differential between the market rate and the rate guaranteed by the "ceiling interest rate agreement". If interest rates rise above the reference rate, the borrower is protected by receiving compensation from the guarantor in the form of a cash settlement equal to the excess of the rate the borrower is paving over the reference rate.
Generally, in our opinion, a ceiling rate guarantee fee described above is deductible when paid if the amount is reasonable and if interest on the borrowings is deductible.
We trust this will be of assistance to you. As you no doubt know, this is an opinion and as such is not binding on the Department.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch