16 April 2008 Internal T.I. 2008-0274221I7 - Meaning of "year" in 74.5(2)

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: Meaning of the phrase "was payable in respect of the particular year"

Position: The references to interest payable "in respect of the particular year" in paragraph 74.5(2)(b) and "in respect of each taxation year" in paragraph 74.5(2)(c) mean interest payable on the loan or indebtedness in respect of the particular calendar year.

Reasons: Subsection 74.5(2) of the Act provides an exemption from the attribution rules contained in subsections 74.1(1) and (2) and section 74.2. Those provisions are concerned with the attribution of income or losses between individuals for a "taxation year". Paragraph 249(1)(b) of the Act defines the taxation year of an individual to be the calendar year.

 								April 16, 2008

Appeals							Lori Carruthers, CA
London TSO
Attention: Doug Atkinson
								2008-027422

Meaning of particular year and subsection 74.5(2)

This is in reply to your email of April 8, 2008, wherein you asked our assistance to clarify the availability of an exemption, pursuant to subsection 74.5(2) of the Income Tax Act (the "Act"), from the attribution rules contained in subsections 74.1(1) and (2) of the Act. Your request outlined the following scenario:

• The loan was a bona fide loan between taxpayer and trust;
• There is a promissory note that was drafted on December 19, 2002;
• The legal agreement states that the interest shall be calculated and payable annually;
• The full and unpaid principal shall be due and payable 10 days after demand; and,
• The first payment of interest was made December 19, 2003.

It is your position that the exemption provided in subsection 74.5(2) does not apply to the above scenario since no interest was paid on the promissory note within 30 days following the end of the taxation year during which the promissory note was made (i.e., January 30, 2003).

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in a manner set out in Information Circular 70-6R5. The following comments are, therefore, of a general nature only.

We concur with your position that the exemption provided in subsection 74.5(2) does not apply to the scenario outlined in your request since no interest was paid on the promissory note within 30 days following the end of the taxation year during which the promissory note was made (i.e., January 30, 2003).

Subsection 74.5(2) of the Act (reproduced below) provides an exemption from the attribution rules contained in subsections 74.1(1) and (2) and section 74.2 for loans and indebtedness of property that bear a commercial rate of interest.

74.5(2) Loans for value - Notwithstanding any other provision of this Act, subsections 74.1(1) and (2) and section 74.2 do not apply to any income, gain or loss derived in a particular taxation year from lent property or from property substituted therefor if

(a) interest was charged on the loan at a rate equal to or greater than the lesser of

(i) the prescribed rate that was in effect at the time the loan was made, and
(ii) the rate that would, having regard to all the circumstances, have been agreed on, at the time the loan was made, between parties dealing with each other at arm's length;

(b) the amount of interest that was payable in respect of the particular year in respect of the loan was paid not later than 30 days after the end of the particular year; and

(c) the amount of interest that was payable in respect of each taxation year preceding the particular year in respect of the loan was paid not later than 30 days after the end of each such taxation year.

The "particular year" and "taxation year" in the paragraphs 74.5(2)(b) and (c) of the Act respectively, are the same as the "particular taxation year" referred to in the preamble to the subsection. Furthermore, the "particular taxation year" referred to in the preamble to the subsection, in our view, is in turn the same "taxation year" referred to in subsections 74.1(1) and 74.1(2) and section 74.2 of the Act.

Subsections 74.1(1) and 74.1(2) and section 74.2 of the Act are concerned with the attribution of income or losses between individuals for a "taxation year". Paragraph 249(1)(b) of the Act defines the taxation year of an individual to be the calendar year. Consequently, the anniversary date of the loan or indebtedness is irrelevant to the application of subsection 74.5(2) of the Act and, in our view, the reference to interest payable "in respect of the particular year" and "in respect of each taxation year" means interest payable on the loan or indebtedness in respect of that particular calendar year - i.e., December 31.

Therefore, for the exemption in subsection 74.5(2) of the Act to apply, in our view, interest, at a rate not less than the prescribed or a commercial rate of interest in effect at the time the loan or indebtedness was incurred, must be charged and paid not later than 30 days after the end of each calendar year in which the loan is outstanding.

The argument that the interest payable requirement in paragraph 74.5(2)(b) is satisfied because the terms of the promissory note do not require an interest payment until December 19, 2003, in our view, is without merit. The fact that the interest charged in respect of the promissory note for the 2002 calendar was not paid until after January 30, 2003, in our view, confirms that the exemption from the attribution rules provided by subsection 74.5(2) should not apply in the scenario outlined in your request.

R.A. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate