CRA indicates that negative interest is deductible under s. 9 if there is a reasonable expectation of receiving (positive) interest

CRA was asked whether a negative interest rate borne on a deposit with a financial institution (which, so far, is a European rather than North American phenomenon) would be deductible by the depositor. Much of the issue was assumed away by positing that in each year there would always be some months in which the deposit bore positive interest.

CRA responded that the negative interest was not a contra item to the interest income generated in the year, but that such negative return would likely be deductible under s. 9 given that there was a reasonable expectation of earning interest income on the deposit in the year.

CRA did not raise any issue of the negative return being on capital account. This is broadly consistent with its longstanding position (e.g., 2004-008091) that all amounts payable or receivable pursuant to an interest rate swap agreement (including a termination payment) will be considered to be on income account, even though the underlying amount being hedged (the interest) generally is a capital expenditure which is deductible only under s. 20(1)(c) and not under s. 9.

Neal Armstrong. Summaries of 14 June 2017 External T.I. 2016-0666411E5 under s. 18(1)(a) – loans and financing charges and s. 40(2)(g)(ii).