CUSMA Rules of Origin Regulations (SOR/2020-155)
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Regulations are current to 2024-04-01 and last amended on 2020-07-01. Previous Versions
APPENDIXExample Illustrating the Application of the Method for Calculating Non-allowable Interest Costs in the Case of a Fixed-rate Contract
The following example is based on the figures set out in the table below and on the following assumptions:
(a) a producer in a CUSMA country borrows $1,000,000 from a person of the same CUSMA country under a fixed-rate contract;
(b) under the terms of the contract, the loan is payable in 10 years with interest paid at the rate of 6% per year on the declining principal balance;
(c) the payment schedule calculated by the lender based on the terms of the contract requires the producer to make annual payments of principal and interest of $135,867.36 over the life of the contract;
(d) there are no federal government debt obligations that have maturities equal to the six-year weighted average principal maturity of the contract; and
(e) the federal government debt obligations that are nearest in maturity to the weighted average principal maturity of the contract are of five- and seven-year maturities, and the yields on them are 4.7% and 5.0%, respectively.
| Years of Loan | Principal BalanceFootnote for 1($) | Interest PaymentFootnote for 2($) | Principal PaymentFootnote for 3($) | Payment Schedule ($) | Weighted Principal PaymentFootnote for 4($) |
|---|---|---|---|---|---|
| 1 | 924,132.04 | 60,000.00 | 75,867.96 | 135,867.96 | 75,867.96 |
| 2 | 843,712.00 | 55,447.92 | 80,420.04 | 135,867.96 | 160,840.08 |
| 3 | 758,466.76 | 50,622.72 | 85,245.24 | 135,867.96 | 255,735.72 |
| 4 | 668,106.81 | 45,508.01 | 90,359.95 | 135,867.96 | 361,439.82 |
| 5 | 572,325.26 | 40,086.41 | 95,781.55 | 135,867.96 | 478,907.76 |
| 6 | 470,796.81 | 34,339.52 | 101,528.44 | 135,867.96 | 609,170.67 |
| 7 | 363,176.66 | 28,247.81 | 107,620.15 | 135,867.96 | 753,341.06 |
| 8 | 249,099.30 | 21,790.60 | 114,077.36 | 135,867.96 | 912,618.88 |
| 9 | 128,177.30 | 14,945.96 | 120,922.00 | 135,867.96 | 1,088,298.02 |
| 10 | 0.00 | 7,690.66 | 128,177.32 | 135.867.96 | 1,281,773.22 |
| $5,977,993.19 |
Return to footnote 1The principal balance represents the loan balance at the end of each full year the loan is in effect and is calculated by subtracting the current year’s principal payment from the prior year’s ending loan balance.
Return to footnote 2Interest payments are calculated by multiplying the prior year’s ending loan balance by the contract interest rate of 6%.
Return to footnote 3Principal payments are calculated by subtracting the current year’s interest payments from the annual payment schedule amount.
Return to footnote 4The weighted principal payment is determined by, for each year of the loan, multiplying that year’s principal payment by the number of years the loan had been in effect at the end of that year.
The weighted average principal maturity of the contract is calculated by dividing the sum of the weighted principal payments by the original loan amount and rounding the amount determined to the nearest decimal place.
Weighted Average Principal Maturity
$5,977,993.19 ÷ $1,000,000 = 5.977993 or 6 years
By applying the above method,
(1) the weighted average principal maturity of the payment schedule under the 6% contract is six years;
(2) the interest rates issued by the federal government on the closest maturities for comparable debt obligations of five years and seven years are 4.7% and 5.0%, respectively; therefore, using linear interpolation, the interest rate issued by the federal government that has a maturity equal to the weighted average principal maturity of the contract is 4.85%. This number is calculated as follows:
4.7 + [((5.0 − 4.7) × (6 − 5)) ÷ (7 − 5)]
= 4.7 + 0.15
= 4.85%; and
(3) the producer’s contract interest rate of 6% is within 700 basis points of the 4.85% interest rate issued by the federal government on debt obligation; therefore, none of the producer’s interest costs are considered to be non-allowable interest costs for the purposes of the definition non-allowable interest costs in subsection 1(1) of these Regulations.
Example Illustrating the Application of the Method for Calculating Non-allowable Interest Costs in the Case of a Variable-rate Contract
The following example is based on the figures set out in the tables below and on the following assumptions:
(a) a producer in a CUSMA country borrows $1,000,000 from a person of the same CUSMA country under a variable-rate contract;
(b) under the terms of the contract, the loan is payable in 10 years with interest paid at the rate of 6% per year for the first two years and 8% per year for the next two years on the principal balance, with rates adjusted each two years after that;
(c) the payment schedule calculated by the lender based on the terms of the contract requires the producer to make annual payments of principal and interest of $135,867.96 for the first two years of the loan and of $146,818.34 for the next two years of the loan;
(d) there are no federal government debt obligations that have maturities equal to the 1.9-year weighted average principal maturity of the first two years of the contract;
(e) there are no federal government debt obligations that have maturities equal to the 1.9-year weighted average principal maturity of the third and fourth years of the contract; and
(f) the federal government debt obligations that are nearest in maturity to the weighted average principal maturity of the contract are one- and two-year maturities, and the yields on them are 3.0% and 3.5%, respectively.
| Beginning of Year | Principal Balance ($) | Interest Rate (%) | Interest Payment ($) | Principal Payment ($) | Payment Schedule ($) | Weighted Principal Payment ($) |
|---|---|---|---|---|---|---|
| 1 | 1,000,000.00 | 6.00 | 60,000.00 | 75,867.96 | 135,867.96 | 75,867.96 |
| 2 | 924,132.04 | 6.00 | 55,447.92 | 80,420.04 | 135,867.96 | 1,848,264.08 |
| $1,924,132.04 |
Weighted Average Principal Maturity
$1,924,132.04 ÷ $1,000,000 = 1.92413204 or 1.9 years
By applying the above method:
(1) the weighted average principal maturity of the payment schedule of the first two years of the contract is 1.9 years;
(2) the interest rate issued by the federal government on the closest maturities of debt obligations of one year and two years are 3.0 and 3.5%, respectively; therefore, using linear interpolation, the interest rate issued by the federal government on debt obligation that has a maturity equal to the weighted average principal maturity of the payment schedule of the first two years of the contract is 3.45%. This amount is calculated as follows:
3.0 + [((3.5 − 3.0) × (1.9 − 1.0)) ÷ (2.0 − 1.0)];
= 3.0 + 0.45
= 3.45%; and
(3) the producer’s contract rate of 6% for the first two years of the loan is within 700 basis points of the 3.45% interest rate issued by the federal government on debt obligations that have maturities equal to the 1.9-year weighted average principal maturity of the payment schedule of the first two years of the producer’s loan contract; therefore, none of the producer’s interest costs are considered to be non-allowable interest costs for the purposes of the definition non-allowable interest costs in subsection 1(1) of these Regulations.
Beginning of Year Principal Balance ($) Interest Rate (%) Interest Payment ($) Principal Payment ($) Payment Schedule ($) Weighted Principal Payment ($) 1 1,000,000.00 6.00 60,000.00 75,867.96 135,867.96 2 924,132.04 6.00 55,447.92 80,420.04 135,867.96 3 843,712.01 8.00 67,496.96 79,321.38 146,818.34 79,321.38 4 764,390.62 8.00 61,151.25 85,667.09 146,818.34 1,528,781.24 1,608,102.62
Weighted Average Principal Maturity
$1,608,102.62 ÷ $843,712.01 = 1.905985 or 1.9 years
By applying the above method:
(1) the weighted average principal maturity of the payment schedule under the first two years of the contract is 1.9 years;
(2) the federal government debt obligations that are nearest in maturities to the weighted average principal maturity of the contract are one- and two-year maturities, and the yields on them are 3.0 and 3.5%, respectively; therefore, using linear interpolation, the interest rate issued by the federal government on debt obligation that has a maturity equal to the weighted average principal maturity of the payment schedule of the first two years of the contract is 3.45%. This amount is calculated as follows:
3.0 + [((3.5 − 3.0) × (1.9 − 1.0)) ÷ (2.0 − 1.0)];
= 3.0 + 0.45
= 3.45%
(3) the producer’s contract interest rate, for the third and fourth years of the loan, of 8% is within 700 basis points of the 3.45% interest rate issued by the federal government on debt obligations that have maturities equal to the 1.9-year weighted average principal maturity of the payment schedule under the third and fourth years of the producer’s loan contract; therefore, none of the producer’s interest costs are considered to be non-allowable interest costs for the purposes of the definition non-allowable interest costs in subsection 1(1) of these Regulations.
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