A developer may thus enhance its access to funds and the lender may participate in a project's potential profitability. Until the November 30 amendment, a developer-borrower might currently deduct a qualified participation payment as interest expense or otherwise over five years as an expense incurred in the course of borrowing funds. Revenue traditionally said that a participation payment often did not qualify as interest, which must be calculated on a daily accrual basis and on a principal sum or a right thereto and must represent compensation for the use of the principal sum or the right thereto. Although participation payments were held deductible as borrowing costs by the FCA in Yonge-Eglinton, Revenue said that the decision was limited in scope to commitment fees. The more recent Sherway Gardens decision allowed the deduction of participation payments as interest expense.
Act discourages entrepreneurship. . . .
Revenue agrees that the Sherway participation payments were not distributions of profit because the sum of the stated interest and the participation payments approximated the then current commercial rate of interest.