13 January 2000 Internal T.I. 9931307 - INTEREST INCOME

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether a portion of the interest from an 18-month GIC can be reported in the year of purchase and the remaining portion in the following year when received.

Position: Yes

Reasons: Accrual basis of accounting under GAAP, and subsection 9(1), paragraph 12(1)(c) and subsection 12(4) of the Act.

		January 13, 2000

	OTTAWA TSO	HEADQUARTERS
	Problem Resolution Program	B. Kerr
		957-2744
	Attention: Debbie Cole
		1999-001280

Subsection 12(4) - Interest Income

This is in reply to your facsimile of November 30, 1999, requesting our comments regarding the reporting of interest income from an 18-month guaranteed investment certificate.

Subsection 9(1) of the Act provides that a taxpayer's income for a taxation year from a property is the taxpayer's profit from that property for the year. It is our view that generally accepted accounting principles must be used in calculating income for purposes of section 9, unless the Act specifically provides otherwise.

As stated in the CICA handbook, the accrual basis of accounting recognizes the effect of transactions and events in the period in which the transactions and events occur, regardless of whether there has been a receipt or payment of cash or its equivalent. Revenues are generally recognized when performance is achieved and reasonable assurance regarding measurement and collectability of the consideration exists. Revenues arising from the use by others of enterprise resources yielding interest, royalties and dividends should be recognized when reasonable assurance exists regarding measurement and collectability. The revenue in the case of interest should be recognized on a time proportion basis.

Paragraph 12(1)(c) provides that in computing income from a business or property a taxpayer must include any amount of interest received or receivable by the taxpayer in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's income) to the extent that the interest was not included in computing the taxpayer's income for a preceding taxation year. However, this provision recognizes that the taxpayer may be following the accrual basis of accounting such that the income may have already been reported.

Subsection 12(4) provides that where in a taxation year a taxpayer holds an interest in an investment contract on any anniversary day of the contract, the taxpayer must include in income for the year the interest that accrued to the end of that day, to the extent that the interest was not otherwise included in computing the taxpayer's income for the year or any preceding taxation year. Subsection 12(11) defines the term "anniversary day" in relation to an investment contract to mean (a) the day that is one year after the day immediately preceding the date of issue of the contract, (b) the day that occurs at every successive one year interval from the day determined under paragraph (a), and (c) the day on which the contract was disposed of; and the term "investment contract" in relation to a taxpayer to mean any debt obligation other than, inter alia, an obligation in respect of which the taxpayer has at periodic intervals of not more than one year, included, in computing the taxpayer's income throughout the period in which the taxpayer held an interest in the obligation, the income accrued thereon for such intervals. Subsection 12(9) provides that where a taxpayer acquires an interest in a prescribed debt obligation, inter alia, for the purposes of subsection 12(4), an amount determined in prescribed manner shall be deemed to accrue to the taxpayer as interest in each taxation year during which the taxpayer holds the obligation. Subsection 7000(1) of the Income Tax Regulations defines a "prescribed debt obligation" and subsection 7000(2) determines the accrued interest thereon.

The decision in the West Kootenay Power and Light Company Limited case (92 DTC 6023) confirms that income for tax purposes, must be computed in accordance with a method within GAAP that produces the "truer picture" and when there is only one acceptable method within GAAP and that method is reflected in the financial statements, the income for tax purposes, absent a specific provision of the Act, should not be different.

Although paragraphs 12(1)(c), and 12(4) are specific provisions in respect of interest, they do recognize that the taxpayer may have reported the interest income in a prior taxation year. You have stated that the taxpayer reported $XXXXXXXXXX of interest income in 1996 and $XXXXXXXXXX of interest income in 1997. Although you have not indicated what the interest rate was or how the taxpayer calculated the amounts he reported, it appears that he has used an reasonable time proportion method of reporting his accrued interest income in accordance with GAAP and the intention of the provisions of subsection 9(1), paragraph 12(1)(c) and subsection 12(4) of the Act.

for Director
Financial Industries Division
Income Tax Rulings Directorate

Policy and Legislation Branch.

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