31 July 1990 Internal T.I. 9003127 F - Disposition of Income Debentures

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.

On April 4, 1990 your letter of December 20, 1989 to International Audits Division regarding                               24(1) Our understanding of the facts is as follows:

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Your Opinion

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Our Opinion

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12.      The term "income debenture" is defined in subsection  248(1) of the Act to mean "...a debenture in respect of  Which interest or dividends are payable only to the extent that the issuing corporation has made a profit before taking into account the interest or dividend obligation..."  In Timagami Financial Services Limited v. Her Majesty The Queen, 81 DTC 5064, affd 82 DTC 6268         (FCA), Gibson, J., commented that "... the word `payable' ... is synonymous with due, a present obligation to pay

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14.           Pursuant to subsection 12(3) of the Act, for taxation  years commencing after October 28, 1980, any interest accrued to the end of the year to a corporation on a debt obligation must be included in its income for the taxation year except to the extent that any such interest was included in its income for a previous taxation year. 

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15.           Subsection 20(14) of the Act provides that accrued interest to the date of sale of a debt obligation is included in the income of the transferor and an offsetting deduction is permitted to the transferee to the extent that the amount was included as interest in computing his income for the year.

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     Subsection 20(14) of the Act requires recognition of  interest accrued "...for a period commencing before the time of transfer and ending at that time that is not payable until after that time ..."  These words are broad enough to include a situation wherein no interest has been paid to the date of assignment or transfer.

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     Stated in paragraph 6 of Interpretation Bulletin IT-401R, the transferor of an interest-bearing        obligation must include an amount as interest in computing the transferor's income in order that the         transferee may get a deduction by virtue of paragraph 20(14)(b) of the Act.

     The position in paragraph 6 of IT-401R is supported by a recent court case, Her Majesty The Queen v. H. Boris Antosko and Stanley F. Trzop, 90 DTC 6111 (FC-TD), wherein the Court decided that paragraphs (a) and (b) of subsection 20(14) of the Act had to be read together as         whole.

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17.      Subsection 20(21) of the Act permits a deduction for over accrued interest on debt obligation in a taxation year in which the debt obligation is disposed of at its fair market value.

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18.      Paragraphs 3 and 4 of IT-410R discuss the application of subsection 20(14) to the transferor.  Paragraph 3 of that bulletin states: "...where the assignor of a mortgage accepts consideration equal to, say, 50% of the total of the principal amount outstanding and the         accrued interest, because the realization of any principal or interest is uncertain, the assignor is obliged to include in income the full amount of interest accrued from the interest date previous to the transfer.

     These paragraphs do not address the possible application of subsection 20(21) of the Act by 1980-81-82-83, c.140, s. 12(9).  We will notify the Publications Division of this omission.                               24(1)We hope our comments are of assistance to you.  Should you have any questions, please contact Peter Lee.

ChiefLeasing and Financing SectionFinancial Industries DivisionRulings Directoratec.c.  Mr. D.L. Cumming      Chief, Policy and Research Section (West)      International Audits Division      Audit Programs Directorate