28 May 1986 Income Tax Severed Letter 7-0619 - [Gain on Redemption of Bonds]

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.

HEAD OFFICE Peter E. Salvatori (613)995-1787

Gain on Redemption of Bonds

This is reply to your memorandum of April 29, 1996.

You have requested our opinions with respect to four issues relating to the taxation of acceptance companies which are wholly owned subsidiaries of large department stores. In particular you wish to know (1) whether such taxpayers are 'moneylenders' for the purposes of the Act; (2) how to tax gains and losses realized by such taxpayers on the buy-back of indebtedness; and (3) our views on the availability to such taxpayers of the doubtful and bad debt provisions in paragraphs 20(1)(l) and 20(1)(p) of the Act.

As you know, this Division has recently ruled that losses realized by the XXXX on the buy back of uneconomic long term debt should be recognized as income losses on the basis that the taxpayer was a moneylender and that comments in paragraph 22 of IT-114

would be applicable. In fact, this position goes back some thirty years and the particular taxpayer had about fifteen years ago been reassessed for gains realized on a buy-back to meet sinking fund requirements on the basis that these gains were of an income nature. The documentation relating to this earlier reassessment was submitted together with the ruling request and our research indicated that rulings to the same effect had previously been given.

As to whether such taxpayers are properly 'moneylenders' for the purpose of the Act, the question is in our opinion controversial. There is no authority directly on point. Although cases decided under the various Canadian and British Moneylender's Acts would tend to suggest that acceptance companies are not moneylenders (see e.g. Transport & General Credit v. Morgan [1939] Ca. 531) there is no guarantee that the expression is to be given the same meaning for the purposes of the Income Tax Act. Even assuming that acceptance companies are moneylenders, it is not altogether clear in law that their gains and losses realized on the buy-back of long term debt should be treated otherwise than on capital account, which, as your reference to the Dominion Electrohome Industries case suggests, is the normal treatment for business corporations.

XXXX

With regard to the Appeal Division's suggestion that the trade receivables acquired by an acceptance company may be regarded as inventory, we note that this apparently worthy argument was not accepted by Gibson, J., in Ted Davy Finance Co. Limited v. M.N.R., 64 DTC 5124, and Don Finance Co. Limited v. M.N.R. 64 DTC 5126. The argument was furthermore not even canvassed in Curtlett v. M.N.R., 66 DTC 5200.

Chief Financial Institutions Section Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch