Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: A Canadian corporation has an outstanding debt to a specified non-resident. The first level of interest is accruing, but is not due. If a second level of interest (i.e. compound interest) is paid on the first level of interest, will we consider the first level of interest to be "outstanding debts to specified non-residents" as defined in subsection 18(5) of the Act?
Position: Yes
Reasons: We consider that the first level of interest is "outstanding" for purposes of subsection 18(5).
XXXXXXXXXX
2002-013662
S. E. Thomson
November 14, 2002
Dear XXXXXXXXXX:
Re: Compound Interest and Thin Capitalization
This is in reply to your letter of April 24, 2002, in which you ask for our comments on the following hypothetical scenario:
A Canadian corporation (Canco) has an outstanding, interest-bearing loan owing to a specified non-resident. Before any interest is due, Canco can elect either to pay the interest monthly, or to pay the interest two years after the end of the year in which it would otherwise be due (called "deferred interest"). If Canco elects the deferred interest method, compound interest will be paid monthly on the deferred interest. You would like to know if we would consider the deferred interest to be an "outstanding debt to specified non-residents" as defined in subsection 18(5) of the Income Tax Act (the "Act").
Although you have asked for our technical interpretation on a hypothetical situation, it appears that your request involves a transaction or series of transactions contemplated by a specific taxpayer. As such, we are precluded from commenting on your situation except in the context of an advance income tax ruling. However, we are able to offer the following general comments regarding the relevant provisions of the Act. Since these comments are general in nature, they may or may not apply in your situation, and accordingly, are not binding on the Canada Customs and Revenue Agency.
In our view, the words "debt or other obligation to pay an amount" in the definition "outstanding debts to specified non-residents" in subsection 18(5) of the Act would capture accrued interest payable on a loan. This would be the case even if the accrued interest is merely "payable", but is not yet due. Therefore, in your scenario, if any compound interest is paid on the deferred interest in the year, the deferred interest will be included in Canco's outstanding debts to specified non-residents, as defined in subsection 18(5) of the Act.
We trust that our comments have been helpful.
Yours truly,
Olli Laurikainen
for Director
International & Trusts Division
Income Tax Rulings Directorate
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