24 July 1990 Ruling 901231 F - Prepayment of Debt Obligation

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.

July 24, 1990

Dear Sirs:

Re:  Prepayment of a debt obligation

This is in reply to your letter of June 15, 1990 wherein you requested our opinion on the meaning of the phrase "may not under any circumstances be obliged to pay more than 25% of (...) the principal amount of the obligation" found in subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act").

Your particular example submitted to us provides for a debt obligation that otherwise qualifies within the said subparagraph which includes scheduled mandatory payments together with allowable voluntary repayments to be made during the first five years term of the obligation. You asked us to comment on the necessity of subtracting these voluntary repayments from the scheduled repayments of the obligation.

As stated in paragraph 7 of Interpretation Bulletin IT-361R2 dated June 16, 1989, it is the Department's view that an obligation which otherwise qualifies under subparagraph 212(1)(b)(vii) of the Act is not disqualified only because prepayment is permitted, at the issuer's discretion, of more than 25% of the principal amount within five years of the date of its issue; that is, there is no obligation on the part of the issuer to make the payment.

Therefore borrower exercise of its right of prepayment within the first five years term, it is our opinion that the qualification of the obligation remains in effect. Accordingly, there is no need to subtract the prepayments made from the scheduled payments left within the term.

Our comments contained herein are provided pursuant to the practice referred to in paragraph 24 of Information Circular 70-6R dated December 18, 1978 and are not rulings. If you have a particular fact situation similar to the circumstances outlined above, you may wish to apply for an advance income tax ruling which is binding upon our Department in accordance with above stated Information Circular.

We hope our comments are of assistance to you.

Yours truly,

for Acting DirectorBilingual Services and Resource Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch