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NAFTA Rules of Origin Regulations (SOR/94-14)

Regulations are current to 2020-07-28 and last amended on 2019-06-17. Previous Versions

SCHEDULE XIMethod for Calculating Non-Allowable Interest Costs

Definitions and Interpretation

  • 1 For purposes of this Schedule,

    fixed-rate contract

    fixed-rate contract means a loan contract, instalment purchase contract or other financing agreement in which the interest rate remains constant throughout the life of the contract or agreement; (contrat à taux fixe)

    linear interpolation

    linear interpolation means, with respect to the yield on federal government debt obligations, the application of the following mathematical formula:

    A + [((B - A) × (E - D)) / (C - D)]

    where

    A
    is the yield on federal government debt obligations that are nearest in maturity but of shorter maturity than the weighted average principal maturity of the payment schedule under the fixed-rate contract or variable-rate contract to which they are being compared,
    B
    is the yield on federal government debt obligations that are nearest in maturity but of greater maturity than the weighted average principal maturity of that payment schedule,
    C
    is the maturity of federal government debt obligations that are nearest in maturity but of greater maturity than the weighted average principal maturity of that payment schedule,
    D
    is the maturity of federal government debt obligations that are nearest in maturity but of shorter maturity than the weighted average principal maturity of that payment schedule, and
    E
    is the weighted average principal maturity of that payment schedule; (interpolation linéaire)
    payment schedule

    payment schedule means the schedule of payments, whether on a weekly, bi-weekly, monthly, yearly or other basis, of principal and interest, or any combination thereof, made by a producer to a lender in accordance with the terms of a fixed-rate contract or variable-rate contract; (échéancier)

    variable-rate contract

    variable-rate contract means a loan contract, instalment purchase contract or other financing agreement in which the interest rate is adjusted at intervals during the life of the contract or agreement in accordance with its terms; (contrat à taux variable)

    weighted average principal maturity

    weighted average principal maturity means, with respect to fixed-rate contracts and variable-rate contracts, the numbers of years, or portion thereof, that is equal to the number obtained by

    • (a) dividing the sum of the weighted principal payments,

      • (i) in the case of a fixed-rate contract, by the original amount of the loan, and

      • (ii) in the case of a variable-rate contract, by the principal balance at the beginning of the interest rate period for which the weighted principal payments were calculated, and

    • (b) rounding the amount determined under paragraph (a) to the nearest single decimal place and, where that amount is the midpoint between two such numbers, to the greater of those two numbers; (échéance moyenne pondérée applicable au principal)

    weighted principal payment

    weighted principal payment means,

    • (a) with respect to fixed-rate contracts, the amount determined by multiplying each principal payment under the contract by the number of years, or portion thereof, between the date the producer entered into the contract and the date of that principal payment, and

    • (b) with respect to variable-rate contracts

      • (i) the amount determined by multiplying each principal payment made during the current interest rate period by the number of years, or portion thereof, between the beginning of that interest rate period and the date of that payment, and

      • (ii) the amount equal to the outstanding principal owing, but not necessarily due, at the end of the current interest rate period, multiplied by the number of years, or portion thereof, between the beginning and the end of that interest rate period; (paiement de principal pondéré)

    yield on federal government debt obligations

    yield on federal government debt obligations means

    • (a) in the case of a producer located in Canada, the yield for federal government debt obligations set out in the Bank of Canada’s Weekly Financial Statistics

      • (i) where the interest rate is adjusted at intervals of less than one year, under the title “Treasury Bills”, and

      • (ii) in any other case, under the title “Selected Government of Canada benchmark bond yields”,

        for the week that the producer entered into the contract or the week of the most recent interest rate adjustment date, if any, under the contract,

    • (b) in the case of a producer located in Mexico, the yield for federal government debt obligations set out in La Seccion de Indicadores Monetarios, Financieros, y de Finanzas Publicas, de los Indicadores Economicos, published by the Banco de Mexico under the title "Certificados de la Tesoreria de la Federacion" for the week that the producer entered into the contract or the week of the most recent interest rate adjustment date, if any, under the contract, and

    • (c) in the case of a producer located in the United States, the yield for federal government debt obligations set out in the Federal Reserve statistical release (H.15) Selected Interest Rates

      • (i) where the interest rate is adjusted at intervals of less than one year, under the title “U.S. government securities, Treasury bills, Secondary market”, and

      • (ii) in any other case, under the title “U.S. Government Securities, Treasury constant maturities”,

        for the week that the producer entered into the contract or the week of the most recent interest rate adjustment date, if any, under the contract. (rendement des titres d’emprunt du gouvernement fédéral)

General

  • 2 For purposes of calculating non-allowable interest costs

    • (a) with respect to a fixed-rate contract, the interest rate under that contract shall be compared with the yield on federal government debt obligations that have maturities of the same length as the weighted average principal maturity of the payment schedule under the contract (that yield determined by linear interpolation, where necessary);

    • (b) with respect to a variable-rate contract

      • (i) in which the interest rate is adjusted at intervals of less than or equal to one year, the interest rate under that contract shall be compared with the yield on federal government debt obligations that have maturities closest in length to the interest rate adjustment period of the contract, and

      • (ii) in which the interest rate is adjusted at intervals of greater than one year, the interest rate under the contract shall be compared with the yield on federal government debt obligations that have maturities of the same length as the weighted average principal maturity of the payment schedule under the contract (that yield determined by linear interpolation, where necessary); and

    • (c) with respect to a fixed-rate or variable-rate contract in which the weighted average principal maturity of the payment schedule under the contract is greater than the maturities offered on federal government debt obligations, the interest rate under the contract shall be compared to the yield on federal government debt obligations that have maturities closest in length to the weighted average principal maturity of the payment schedule under the contract.

APPENDIX“Example” 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 NAFTA country borrows $1,000,000 from a person of the same NAFTA 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 cent 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 6-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 5- and 7-year maturities, and the yields on them are 4.7 per cent and 5.0 per cent, respectively.

    Years of LoanPrincipal BalanceFootnote for 1Interest PaymentFootnote for 2Principal PaymentFootnote for 3Payment ScheduleWeighted 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 per cent

    • 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

    • Return to footnote 5the 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 yearsFootnote 5

By applying the above method,

  • (1) the weighted average principal maturity of the payment schedule under the 6 per cent contract is 6 years;

  • (2) the yields on the closest maturities for comparable federal government debt obligations of 5 years and 7 years are 4.7 per cent and 5.0 per cent, respectively; therefore, using linear interpolation, the yield on a federal government debt obligation that has a maturity equal to the weighted average principal maturity of the contract is 4.85 per cent. 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 per cent is within 700 basis points of the 4.85 per cent yield on the comparable federal government debt obligation; therefore, none of the producer’s interest costs are considered to be non-allowable interest costs for purposes of the definition non-allowable interest costs.

“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 NAFTA country borrows $1,000,000 from a person of the same NAFTA 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 cent per year for the first two years and 8 per cent 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 1- and 2-year maturities, and the yields on them are 3.0 per cent and 3.5 per cent respectively.

    Beginning of YearPrincipal BalanceInterest Rate (%)Interest PaymentPrincipal PaymentPayment ScheduleWeighted Principal Payment
    1$1,000,000.006.00$60,000.00$75,867.96$135,867.96$     75,867.96
    2    924,132.046.00  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 yield on the closest maturities of federal government debt obligations of 1 year and 2 years are 3.0 and 3.5 per cent, respectively; therefore, using linear interpolation, the yield on a federal government 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 per cent. 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 per cent for the first two years of the loan is within 700 basis points of the 3.45 per cent yield on federal government 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 purposes of the definition non-allowable interest costs.

    Beginning of YearPrincipal BalanceInterest Rate (%)Interest PaymentPrincipal PaymentPayment ScheduleWeighted Principal Payment
    1$1,000,000.006.00$60,000.00$75,867.96$135,867.96
    2    924,132.046.00  55,447.92  80,420.04  135,867.96
    3    843,712.018.00  67,496.96  79,321.38  146,818.34$     79,321.38
    4    764,390.628.00  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 1- and 2-year maturities, and the yields on them are 3.0 and 3.5 per cent, respectively; therefore, using linear interpolation, the yield on a federal government 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 per cent. 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 per cent is within 700 basis points of the 3.45 per cent yield on federal government 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 purposes of the definition non-allowable interest costs.

  • SOR/95-382, s. 2
 
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