Section 16 of the Income Tax Act (Canada) provides that “Where, under a contract or other arrangement, an amount can reasonably be regarded as being in part interest…and in part an amount of a capital nature,…the part of the amount that can reasonably be regarded as interest shall, irrespective of when the contract or arrangement was made or the form or legal effect thereof, be deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable”. That is a mouthful. A classic example is the purchase and sale of property financed by a balance of the sale price payable to the seller in installments over time, without explicit recognition of the interest and principal components of the installment payments. In Plains Midstream Canada ULC v. The Queen, 2017 TCC 207, a predecessor of the taxpayer (Canco) received in the course of a corporate acquisition an amount upfront to assume a large debt obligation that was payable by another Canadian corporation to a Japanese corporation 43 years in the future. The assumed debt obligation was effectively non-interest bearing (it provided for contingent interest, but the contingent event had not occurred). For the years in issue, Canco argued that a portion of the assumed debt obligation could be regarded as deemed interest payable pursuant to s. 16, and thus could be deducted as interest expense under s. 20(1)(c). The Tax Court of Canada did not agree and held that s. 16 did not apply because the amount claimed by Canco (as deemed interest) clearly represented principal (i.e., a capital amount) from the perspective of the Japanese creditor under assumed debt obligation. Based on the text, context, and purpose of s. 16, in order for an amount to be treated as deemed interest under that provision it must reasonably be regarded as being interest from the perspective of both the debtor and the creditor (see paragraph 84). As this condition was not met, s. 16 did not apply.