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.
Principal Issues: Whether interest paid on a student loan in collection status is eligible for the credit for interest on student loan.
Position: Yes, providing a court judgment has not been ordered on the particular loan.
Reasons: Section 118.62 specifically excludes amounts paid on account of a judgement.
October 17, 2011
HAMILTON TAX SERVICES OFFICE HEADQUARTERS
Call Center, Taxpayer Services Income Tax Rulings Directorate
55 Bay St Post Office Box 2220 Kathy Hooey
Hamilton, ON L8N 3E1 (905) 721-5095
Attention: Janine Thackeray 2010-037646
Credit for Interest on Student Loans
This is in response to your request for our views on whether interest paid by a student on a student loan is eligible for the credit under section 118.62 of the Income Tax Act (the "Act") if the particular loan is in collection status.
A tax credit for interest paid on a post-secondary student loan is provided in section 118.62 of the Act. According to section 118.62 of the Act, an amount paid in satisfaction of a judgment is not eligible for a tax credit.
Under the Canada Student Loans Program, loans are provided to eligible post-secondary students under the Canada Student Loans Act or the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to eligible students at the post-secondary school level.
It is our understanding that under the Canada Loans Program, extended interest relief is provided in certain circumstances for students experiencing financial difficulty. If a student defaults on loan payments various actions may be taken to recover the debt including, referral to a credit agency, recovering money through income tax returns, referring loans to a private collection agency and / or taking legal action.
Financial institutions that follow a collections process to recover amounts owed may or may not sell debts to a collection agency. Where a student debt is no longer owing under the Canada Student Loans Act or the Canada Student Financial Assistance Act or law of a province governing the granting of financial assistance to students at the post-secondary school level, the interest paid no longer qualifies under section 118.62 of the Act. Where a collection process involves a legal procedure to enter a court judgment against a student's debt, entitlement to the interest credit under section 118.62 of the Act is lost for the particular student.
Whether the meaning of judgment in section 118.62 extends to the collections process in general is subject to interpretation. The word judgment is not defined in the Act. According to well established jurisprudence (XXXXXXXXXX.), the ordinary meaning of the word should be considered in order to determine a word's appropriate meaning. However, the ordinary meaning of a word may not be intended where a word, such as judgment, has a legal or technical meaning.
In Bombay Jewellery v. The Queen [1998 GTC 2245] the Tax Court of Canada (the "TCC"), in determining whether gold bars were exempt under the Excise Tax Act, applied the technical meaning because it provided a more reasonable term for a "financial instrument" in the precious metals market than the ordinary meaning. The TCC found that there are sections of the GST provisions of the Act that refer to more specific goods and services and it would be reasonable to apply the technical or scientific meaning to the terms in dispute.
Technically, a judgment is a legal action to affirm an obligation. A judgment does not change the character of the debt but confirms that the debt existed. Parliament chose a specific legal term used in the debt collection process in the context of section 118.62 dealing with financial obligations. Therefore, we are of the view that a general inference about its meaning should not be followed. What is intended is a judicial amount ordered.
Where collection actions have been undertaken to collect a student debt described in section 118.62 of the Act, the interest paid in the year, or in certain circumstances a previous year, is eligible for the credit to the extent that a court judgment has not been ordered on the particular debt.
We trust our comments will be of assistance to you.
Yours truly,
Lita Krantz, CA
Assistant Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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