When considering the recharacterisation of interest as a non-deductible distribution there are a number of practical points to watch for.
In respect of non-commercial securities the determination of whether the return to the lender represents a reasonable commercial return is considered solely from the perspective of the lender and only whether the return is commercially reasonable by reference to the principal secured (CTM15502). As such it is important that the risk analysis is undertaken by reference to the lender and particularly the risk that the lender will not receive part or all of the principal (CTM15502).
In addition the commercial reasonableness of the interest rate is determined when the loan was made. As such the relevant time for determining the commercial reasonableness of the interest rate in respect of ‘replacement securities’ (i.e. new securities issued on the same terms as previously issued securities)...
