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: Paragraph 20(1)(c) provides that the interest deduction is restricted to the amount of interest paid or payable "or a reasonable amount in respect thereof, whichever is the lesser." What factors does the Agency consider when determining whether interest payable pursuant to a particular loan agreement exceeds "a reasonable amount in respect thereof, whichever is lesser?"
Position TAKEN: The deduction for interest under paragraph 20(1)(c) is the lesser of the actual amount paid or payable and a reasonable amount. As stated in Shell, "where an interest rate is established in a market of lenders and borrowers acting at arm's length from each other, it is generally a reasonable rate." In considering whether an interest rate is reasonable or not, consideration will be given to comparable prevailing market rates for similar market risks with similar terms, and the existence of any issue premiums.
Reasons FOR POSITION TAKEN: See Shell case.
CALU - Conference for Advance Life Underwriting (2003)
Question 7
Reasonable Amount in Respect of Interest
Paragraph 20(1)(c) stipulates that interest on borrowed money may be deducted in computing a taxpayer's income from a business or property provided that specified conditions are met. However, paragraph 20(1)(c) also provides that the deduction is restricted to the amount of interest paid or payable "or a reasonable amount in respect thereof, whichever is the lesser."
In light of the potential variety of lending arrangements, what factors does the CCRA consider when determining whether the interest payable pursuant to a particular loan agreement exceeds "a reasonable amount in respect thereof?"
Agency's Response
The deduction for interest under paragraph 20(1)(c) is the lesser of the actual amount paid or payable and a reasonable amount. As stated in Shell, "where an interest rate is established in a market of lenders and borrowers acting at arm's length from each other, it is generally a reasonable rate." In considering whether an interest rate is reasonable or not, consideration will be given to comparable prevailing market rates for similar market risks with similar terms, and the existence of any issue premiums.
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