7 April 2009 External T.I. 2008-0277531E5 - 20(1)(m) and upfront loan fees

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: Whether a taxpayer is entitled to claim a 20(1)(m) reserve for the unearned portion of an upfront loan fee collected as part of the initial advance on a loan.

Position: Generally, yes.

Reasons: A reserve pursuant to 20(1)(m) is available for an upfront loan fee to the extent that the amount is described in paragraph 12(1)(a), and included in the taxpayer's income.

									2008-027753
XXXXXXXXXX 								Robert Demeter, CGA
(613) 952-1505
April 7, 2009

Dear XXXXXXXXXX :

RE: Upfront loan fees drawn from initial advance under a lending agreement

We are writing in response to your correspondence dated May 6, 2008, in which you requested our views concerning the taxation of certain loan fees.

In your request, you described a situation in which a taxpayer, in the business of lending money, charges a non-refundable loan fee to a borrower under a loan contract. The loan fee is to be collected through deduction against the first advance on a resulting loan.

You have asked whether the taxpayer would be entitled to a reserve under paragraph 20(1)(m) of the Income Tax Act (hereafter, the "Act") in relation to the unearned portion of such fees collected by the taxpayer.

Our comments:

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Generally, a payment of loan fees, collected at the inception of a loan by a taxpayer operating a lending business, would be included in the taxpayer's income in the year of receipt pursuant to either subsection 9(1) or paragraph 12(1)(a) of the Act, depending upon the nature and terms of the payment received. In addition, on the basis of the decision in Ellis Vision, 1 a taxpayer would be entitled to deduct a reasonable amount of unearned loan fees as a reserve pursuant to paragraph 20(1)(m) of the Act, to the extent that the amount is described by paragraph 12(1)(a) of the Act, and included in the taxpayer's income.

More specifically, we are of the view that the portion of a loan fee that is described by paragraph 12(1)(a) of the Act is that portion that relates to services not rendered before the end of the year, or that may be regarded as not having been earned in the current or prior years.

We trust that these comments will be of assistance to you.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institutions Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 Ellis Vision Inc. v. The Queen, 2004 DTC 2024; 2003 TCC 912; [2004] 2 CTC 2208