25 May 2000 External T.I. 1999-0009795 - SECURITY IN SATISFACTION OF INCOME DEBT

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 subsection 76(1) is applicable to consider that payment of a demand note has been made when one non-resident sells that note to a second non-resident and receives a second demand note as consideration.

Position: No

Reasons: Comments in paragraphs 4 and 8 of IT-77R

XXXXXXXXXX 							1999-000979
J. P. Dunn
Attention:  XXXXXXXXXX 

May 25, 2000

Dear Sirs:

Re: Subsection 76(1) of the Income Tax Act

We are writing in response to your correspondence of September 17, 1999 in which you had requested the views of Canada Customs and Revenue Agency with respect to a situation in which a non-resident of Canada transfers to a second non-resident a demand note receivable from a third non-resident for an amount which includes the principal amount of that note together with accrued interest. The note receivable is in respect of a business carried on in Canada by the third non-resident and the consideration given by the second non-resident consists of a second demand note having a principal amount equal to the total of the principal amount of the original note plus the interest accrued thereon.

You have requested whether, in the opinion of the Agency, subsection 76(1) of the Income Tax Act would be applicable to this type of situation such that the original note and the accrued interest would be considered to have been paid at the time of the transfer thereby requiring a payment of withholding tax pursuant to paragraph 212(1)(b) and subsection 212(13.2) of the Act by the original debtor in respect of that accrued interest.

It is our view that the comments in paragraph 4 of Interpretation Bulletin IT-77R would be applicable to the situation described. That paragraph states:

If the original recipient of a security to which subsection 76(2) applies, assigns his interest in the security before the date on which the underlying debt became payable, the rule in subsection 76(1) applies, if at all, to the assignee who holds the security when the debt becomes payable and not to the original recipient.

Also, at paragraph 8:

Subsection 76(1) applies where the security can be considered to be received in absolute settlement of all or part of the debt, i.e. the taxpayer accepts the security at the risk of it being dishonoured with the only legal recourse being an action against the issuer of the security for failure to honour it.

In our view, there has been no settlement of the original note and, accordingly, subsection 76(1) of the Act would not be applicable to consider that payment of that note had been made.

We trust that this is the information which you require.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch