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:
A Divorce Order from the Family Court provides that pre-judgment interest will be paid to the taxpayer. The calculation is based on a capital amount that consists mostly of the equalization payment owed to the taxpayer. Is the pre-judgment interest taxable to the taxpayer?
Position: Yes.
Reasons: The payment has the quality of interest and is designated as such in the Divorce Order. Furthermore, it is not part of the exceptions administratively allowed by CCRA.
October 30, 2003
Ms. Elizabeth Ross HEADQUARTERS
Shawinigan-Sud TSO Martine Filiatrault, CA
Client Services T1 (613) 957-2121
541-5-1
2003-003526
Pre-judgment interest
This is in response to your memorandum of August 11, 2003 concerning the taxation of pre-judgment interest.
Background
A taxpayer received a payment of pre-judgment interest, which is specifically provided for in a Divorce Order from the Family Court. The calculation of the pre-judgment interest is based on an annual interest rate applied to a capital amount that represents, almost exclusively, the equalization payment specified in the Divorce Order.
Issue
Is the pre-judgment interest taxable for the taxpayer?
Interest income is generally taxable and included in income pursuant to paragraph 12(1)(c) of the Income Tax Act (the "Act"). In our view, pre-judgment interest, if in the nature of interest, will be taxable as interest income. The courts have described interest in general terms as "the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to or owed to another". It is a question of fact whether an amount paid under the terms of a court order or settlement constitutes interest income. In our view, all pre-judgment interest that has been explicitly identified by a court or by means of an out-of-court settlement will constitute interest income in the hands of the recipient for all purposes of the Income Tax Act. The Canada Customs and Revenue Agency ("CCRA") currently makes an administrative exception for pre-judgment interest related to awards for personal injury or death, retroactive worker's compensation payments and wrongful dismissal. Accordingly, pre-judgment interest on these awards is not subject to tax. However, pre-judgement interest related to awards for wrongful dismissal will be taxable as of January 1, 2004.
Therefore, pre-judgment interest calculated in respect of an equalization payment and other amounts, as in the situation presented above, must be included in the recipient's income as provided by paragraph 12(1)(c) of the Act.
We hope our comments are of assistance. If you wish to discuss any of the above further, or if we can be of any further assistance, do not hesitate to contact us at the above number.
Ghislaine Landry, CGA
Manager
Individuals, Business and
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
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