# CCFTA Rules of Origin Regulations (SOR/97-340)

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Regulations are current to 2020-07-28

## SCHEDULE XMethods of Comparison for Purposes of Subsection 6(14) (Non-Allowable Interest Costs)

### PART IProducers Located in Canada

#### Definitions and Interpretation

**1**For purposes of this Part,- 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 national government debt obligations, the application of the following mathematical formula:

A + [((B - A) × (E - D)) / (C - D)]

where

- A
- is the yield on national 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 national 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 national 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 national 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 number of years, or portion thereof, that is equal to the number obtained by

- 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 national government debt obligations
yield on national government debt obligations means the yield for federal government debt obligations set out in the Bank of Canada’s Weekly Financial Statistics

(a) where the producer’s contract is expressed in pesos and there are national government debt obligations of the same maturity as that of the producer’s contract or, in the case of a variable-rate contract, as that of the interest rate adjustment period of the producer’s contract, the interest rate for Pagaré Descontable del Banco Central set out in Sintesis Monetaria y Financiera of the Banco Central de Chile, and

(b) 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. (rendement des titres d’emprunt du gouvernement national)

#### General

**2**For purposes of calculating non-allowable interest costs for a producer located in Canada(a) with respect to a fixed-rate contract, the interest rate under that contract shall be compared with the yield on national 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 national 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 national 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 national government debt obligations, the interest rate under the contract shall be compared to the yield on national government debt obligations that have maturities closest in length to the weighted average principal maturity of the payment schedule under the contract.

### PART IIProducers Located in Chile

#### Definitions and Interpretation

**3**For purposes of this Part,- 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 national government debt obligations, the application of the following mathematical formula:

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

where

- A
- is the yield on national government debt obligations that are nearest in maturity but of shorter maturity than the fixed-rate contract or variable-rate contract to which they are being compared,
- B
- is the yield on national government debt obligations that are nearest in maturity but of greater maturity than that contract,
- C
- is the maturity of national government debt obligations that are nearest in maturity but of greater maturity than that contract,
- D
- is the maturity of national government debt obligations that are nearest in maturity but of shorter maturity than that contract, and
- E
- is the maturity of that contract;

(interpolation linéaire)

- 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)

- yield on national government debt obligations
yield on national government debt obligations means

(a) where the producer’s contract is expressed in pesos and there are national government debt obligations of the same maturity as that of the producer’s contract or, in the case of a variable-rate contract, as that of the interest rate adjustment period of the producer’s contract, the interest rate for Pagaré Descontable del Banco Centrale set out in Sintesis Monetaria y Financiera of the Banco Central de Chile, and

(b) in any other case, the interest rate on national government debt obligations set out in Informe Economico y Financiero, published by the Banco Central de Chile, under the title Tasas de Interes de los Instrumentos del Banco Central de Chile

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

#### General

**4**Subject to section 5, for purposes of calculating non-allowable interest costs for a producer located in Chile(a) with respect to a fixed-rate contract, the interest rate under that contract shall be compared with the yield on national government debt obligations that have maturities of the same length as that of 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 national 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 national government debt obligations that have maturities of the same length as that of 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 maturity of the contract is greater than the maturities offered on national government debt obligations, the interest rate under the contract shall be compared to the yield on national government debt obligations that have maturities closest in length to the maturity of the contract.

**5**For purposes of section 4, where the contract is expressed in pesos and there are no national government debt obligations of the same maturity that are expressed in pesos, the interest rate used for comparison purposes shall be the annual interest rate in the contract minus the annual rate of inflation determined on the basis of the annual Consumer Price Index set out in the Boletin Mensual del Banco Central de Chile for the year preceding the month in which the producer entered into the contract.

## APPENDIX“Example” Illustrating the Application of the Method for Calculating Non-Allowable Interest Costs in the Case of a Fixed-Rate Contract Entered into by a Producer Located in Canada

*The following example is based on the figures set out in the table below and on the following assumptions*:

(a)

*a producer located in Canada borrows $1,000,000 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; and*(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.*

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

^{1}*the 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

^{2}*interest payments are calculated by multiplying the prior year’s ending loan balance by the contract interest rate of 6 per cent*Return to footnote

^{3}*principal payments are calculated by subtracting the current year’s interest payments from the annual payment schedule amount*Return to footnote

^{4}*the 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*

*By applying the above method,*

*(1)**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 — $5,977,993.19 / $1,000,000 = 5.977993 or 6 years;**(2)**there are no national government debt obligations that have maturities equal to the 6-year weighted average principal maturity of the contract;**(3)**the national 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;**(4)**the yields on the closest maturities for comparable national 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 national 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**(5)**the producer’s contract interest rate of 6 per cent is less than the yield on the comparable national government debt obligations plus 700 basis points (4.85 per cent + 7.00 per cent = 11.85 per cent); 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 Entered into by a Producer Located in Canada

*The following example is based on the figures set out in the tables below and on the following assumptions*:

(a)

*a producer located in Canada borrows $1,000,000 from a person in Canada 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; and*(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.*

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 |

*By applying the above method:*

*(1)**the weighted average principal maturity of the payment schedule of the first two years of the contract is $1,924,132.04 / $1,000,000 = 1.92413204 or 1.9 years;**(2)**there are no national government debt obligations that have maturities equal to the 1.9-year weighted average principal maturity of the first two years of the contract;**(3)**the national 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;**(4)**the yield on the closest maturities of national 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 national 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**(5)**the producer’s contract rate of 6 per cent for the first two years of the loan is less than the yield on the comparable national government debt obligations plus 700 basis points (3.45 per cent + 7.00 per cent = 10.45 per cent); therefore, none of the producer’s interest costs for the first two years of the loan are considered to be non-allowable interest costs for purposes of the definition “non-allowable interest costs”.*

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 |

*By applying the above method:*

*(1)**the weighted average principal maturity of the payment schedule under the third and fourth years of the contract is $1,608,102.62 / $843,712.01 = 1.905985 or 1.9 years;**(2)**there are no national 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;**(3)**the national government debt obligations that are nearest in maturity to the weighted average principal maturity of the third and fourth years 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;**(4)**the national government debt obligations that are nearest in maturities to the weighted average principal maturity of the third and fourth years 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 national government debt obligation that has a maturity equal to the weighted average principal maturity of the payment schedule of the third and fourth 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**(5)**the producer’s contract interest rate, for the third and fourth years of the loan, of 8 per cent is less than the yield on comparable national government debt obligations plus 700 basis points (3.45 per cent + 7.00 per cent = 10.45); therefore, none of the producer’s interest costs for the third and fourth year are considered to be non-allowable interest costs for purposes of the definition “non-allowable interest costs”.*

- SOR/2004-298, s. 221

- Date modified: