15 May 2003 External T.I. 2003-0011615 - AMORTIZATION PRESENT VALUE BASIS

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:

Is deemed interest under 18(9.1) in a1992 ruling that is amortized under the straight-line method to XXXXXXXXXX now able to be amortized on a present value basis beginning in XXXXXXXXXX ?

Position TAKEN:

YES, provided there is no undue tax advantage.

REASON FOR POSITION: Position in 950376

									2003-001161
XXXXXXXXXX 								C. Tremblay, CMA
(613) 957-2139
May 15, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Change of amortization method under subsection 18(9.1) of the Income Tax Act (the "Act")

This is in reply to your letter of April 1, 2003, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. As explained in our telephone conversation (XXXXXXXXXX/Tremblay) of April 16, 2003, and as stated in paragraph 15 of Information Circular 70-6R5, we do not rule when the questions concerns tax related calculations. The change from amortizing the defeasance premiums from a straight line to a present value method is related solely to revising the tax calculations.

Your deposit will be returned under separate cover. However, as agreed we will provide you with our views on the methodology question of changing from straight line to present value along with general comments.

In your letter, you stated that XXXXXXXXXX proposes to substitute the amortization determined under the straight-line method for the present value method for years XXXXXXXXXX and onward. You further stated that the amortization would continue to be over the term of the related XXXXXXXXXX and that the present value basis determination of amortization is based on the discount rate in effect at the time of defeasance and equates to market rates at the time of defeasance. As a result of the change, a $XXXXXXXXXX differential between the cumulative amortization under the straight-line versus the present value method will exist on XXXXXXXXXX and XXXXXXXXXX plans to begin deducting this differential in XXXXXXXXXX. The differential would be deducted only to the extent that the present value of the interest on the XXXXXXXXXX that would have been deducted for that particular year had defeasance not taken place, exceeds the amortization of the premium otherwise to be deducted in the year.

Our Comments

In our view, subsection 18(9.1) of the Act requires that the penalty or bonus payment referred to in paragraph 18(9.1)(d) of the Act must not exceed the "value" at that time of an amount that, but for the payment, would have been paid or payable as interest. The condition is intended to apply to the total interest otherwise payable for the term of the obligation and to each taxation year in which the taxpayer claims a deduction. In our view, subsection 18(9.1) of the Act requires that the deduction of the penalty or bonus be spread over what would have been the remaining term of the obligation. It is important that the discount rate be reasonable and that the amount reasonably relates to the interest over the remaining term and in the particular year and that the amount not exceed the value of the interest that would have been paid in respect of the remainder of the term and in the particular year. As the penalty or bonus is paid to relieve the borrower of its obligations over the remaining term of the debt, it relates to each subsequent year of the remaining term. Further, subsection 18(9.1) of the Act applies to each separate transaction involving a payment of a bonus or penalty by a borrower to a lender in respect of a debt obligation. Thus, in our view, where notes are involved, the calculation is based on a series by series basis. Furthermore, the purpose tests in clauses 18(9.1)(f)(ii)(A) and (B) of the Act must continue to be met in each year of the period of deduction.

In our view, where subsection 18(9.1) of the Act applies, the deduction is available based on a present value basis at the time of prepayment of the interest.

The question of whether a taxpayer may switch the method of amortization in mid-stream requires that the method of accounting and tax reporting be consistent from year to year. Generally, where the method of amortization is changed, the CCRA will accept the change if it is reasonable in the circumstances, it does not result in any undue tax advantage and it is in accordance with generally accepted accounting principles and the Act.

XXXXXXXXXX

We hope that our comments are of assistance, but would caution you that they do not constitute an advance income tax ruling, and accordingly, are not binding on the CCRA with respect to any particular transaction.

Yours truly,

Steve Tevlin
For Director,
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch