14 September 2004 Internal T.I. 2004-0080911I7 - Swap-termination payments

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.

Principal Issues: Are termination payments under an interest rate swap deductible under section 9 or tied to the capital of the borrowing?

Position: Generally, deductible under Section 9

Reasons: No lender borrower relationship - considered an adventure in the nature of trade.

 		September 14, 2004

	TORONTO NORTH TSO	HEADQUARTERS
	Compliance Programs Branch	C. Tremblay, CMA
(613) 957-2139
	Attention:  Nizar Thawar
		2004-008091

Swap Termination Payment

This is in reply to your electronic message of June 9, 2004, regarding the above-noted subject.

The CRA is of the view that a derivative agreement such as an interest rate swap is separate from any associated asset or liability for which it may be designed. Thus, any income earned or expense incurred from the swap or other financial derivative would generally not be considered as being derived from the associated asset or liability for which it was designed to hedge. In response to a question posed at the Revenue Canada Round Table of the 1993 Canadian Tax Foundation Conference, Revenue Canada, as CRA was then called, stated:

"All amounts payable or receivable pursuant to an interest rate swap agreement will be considered to be on income account and will be included in or deductible from the income of the taxpayer pursuant to section 9 of the Act."

The CRA's longstanding position regarding interest rate swaps is based on the fact that the swap agreement is a separate legal contract (whether or not the swap is used as a hedge). The nature of the payments derived from such a contract is considered to be income. We believe that this approach is consistent with the comments of the Supreme Court in Shell Canada Ltd., (99 DTC 5699).

We refer you to our document number E 2003-0036081 written to the XXXXXXXXXX Taxation Services Office, which addresses termination payments and the deduction allowed under section 9 of the Act.

We have not received any documents from you, however, it is our view that in the situation you discuss in your electronic message, the termination payments would be on account of income and are deductible.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version from Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Steve Tevlin
For Director
Financial Industries Division
Income Tax Ruling Directorate