19 December 1990 Internal T.I. 73819 F - Interest Rate Exchange Agreement

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.

SUBJECT:  24(1) Interest Rate Exchange Agreement ("IREA")

We are writing in response to your memoranda of April 11 and August 18, 1989 in which you asked various questions relating to an IREA described more fully below. As you are aware  21(1)(b)   We apologize for the delay in responding.

The facts as we understand them are as follows:

Facts

24(1)

24(1)

You have asked for our comments on a number of questions (described below) related to the transfer of the IREA.

Our Comments

1.     Is the IREA property?

     24(1)

     Property is defined in subsection 248(1) of the Act and specifically includes a right of any kind whatever by virtue of paragraph (a) thereof.   23

     24(1)

2.     What type or property is the IREA?

     The classification of the IREA by type of property is a question of fact that is dependent on all of the circumstances of each particular case.

     Paragraph 54(b) defines capital property to be:

(i)     any depreciable property of the taxpayer? and

(ii)     any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer.

     24(1)

     24(1)

     An argument can be made that an IREA may be inventory. Inventory is defined in subsection 248(1) as:

     a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year.

     Obviously, this is an extremely broad definition.

     24(1)

     Business as defined in subsection 248(1) of the Act specifically includes an adventure in the nature of trade.

3.     Can the IREA be transferred pursuant to subsection 85(1) of the Act?

     The types of property that could be transferred pursuant to subsection 85(1) in 1986 were specifically listed therein. In particular, inventory was listed and therefore is eligible to be transferred. For dispositions subsequent to 1986 the property must be "eligible property" which is defined in subsection 85(1.1), paragraph (f) of which includes inventory.

4.     If the IREA cannot be transferred pursuant to subsection 85(1).

     24(1)

5.     If it is a disposal, what is the IREA's fair market value?

     The determination of fair market value is also a question of fact. One method used in the swap industry to determine the fair market value of a swap at any particular time is to determine the present value of the net payments remaining over the term of the swap. That is, discounted cash  24(1)

     Based on the above we are of the view   24(1)

     We would also note that the taxpayer must elect on an amount in order to have a valid transfer under section 85. An amount is an amount of money greater than nil. In this regard we refer you to paragraph 5 of Information Circular 76-19R2.   24(1)   21(1)(b)   Subsection 85(7.1) applies at the discretion of the Minister where it is considered just and equitable to permit a late filing or amendment. Paragraph 900(2)(b) of the Income Tax Regulations delegates this authority to the Director of a District Taxation Office.

7.     If there was a disposal on income account what is the treatment to the transferee?

     24(1)      21(1)(b)

If we can be of further assistance, please contact us.

F. Lee WorkmanChiefFinancial Institution SectionFinancial Industries DivisionRulings Directorate

STATEMENT OF PRINCIPAL ISSUES

Summary of Transactions

-     We were requested to comment on whether a position in an interest rate swap agreement could be transferred on a tax deferred basis using the provisions of section 85.

-     This required a determination of whether the swap position should be considered a property and if so whether it is inventory, capital property or an eligible capital property.

     24(1)

-     The auditor at the Winnipeg D.O. who was reviewing the election forwarded a request for interpretation to us.

Conclusions

23

-     As a general position, the determination of what type of property a swap position should be will be a question of fact depending on such factors as the taxpayer's reasons for entering the swap, how the swap fits into the taxpayer's business, whether it is an isolated transaction or whether the taxpayer is a financial institution.