28 June 1991 Internal T.I. 9107427 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.

7-910742

SUBJECT:            24(1) Disposition of Income Debentures

We are writing in response to your memorandum dated March 6, 1991, wherein you requested clarification of our position concerning the application of subsection 20(14) of the Act. You refer to our earlier reply to you on this matter dated July 31, 1990.

24(1)

This position is consistent with the decision in the case of H.M.T.Q. v. H. Boris Antosko and Stanley F. Trzop, 90 DTC 6111 (FC-TD), and with the Department's response to Question 13 of the 1990 Canadian Tax Foundation Revenue Canada Round Table.

For further details reference is made to our July 31, 1990 memorandum.

The representatives for    24(1)        have now argued that the case of Badshah B. Husain v. M.N.R. 91 DTC 278, confirms what they suggest is RCT's position that subsection 20(14) only applies when both the transferor and the transferee are resident of Canada.

In that case Mrs. Husain, the resident taxpayer, redeemed in 1984 Canada Savings Bonds (the "CSB's"), which had been transferred to her as a consequence of the death of her husband in 1981. The full amount of the interest received by the taxpayer on the redemption of the CSB's was included in her income for the 1984 taxation year pursuant to paragraph 12(1)(c) of the Act.  She was denied a deduction under paragraph 20(14)(b) of the Act in respect of the interest that accrued on the CSB'S prior to the date they were transferred to her.  In arriving at this decision, Sarchuk, T.C.J.stated at pages 283 and 284 that

In order for the provisions of subsection 20(14) to apply all of the relevant elements must be in place. Both the transferor and the transferee must squarely fall within the wording of the section. That means that unless the transferor and transferee are both subject to income tax under Part 1 of the Act the exception created by subsection 20(14) is not available. The position of the Respondent that subsection 20(14) cannot apply when the transferor is not a resident, is amply supported by the authorities cited.

Since Mrs. Husain's non-resident husband, as the transferor of the CSB's, was not subject to income tax under Part I of the Act, no amount could be included in computing his income under paragraph 20(14)(a) of the Act, in respect of interest that had accrued on the CSB's to the date of their transfer to Mrs. Husain. Consequently, Mrs. Husain was precluded from claiming a deduction under paragraph 20(14)(b) of the Act.

We disagree with     24(1)        representatives statement that our position is that subsection 20(14) only applies when both the transferor and transferee are resident in Canada.

Generally speaking, it is our position that if the transferor is a resident of Canada, paragraph 20(14) (a) can apply in respect of a particular assignment or disposition of a debt obligation regardless of the residency of the transferee.  If the transferor is a non-resident then subsection 20(14) cannot apply.

This position is not inconsistent with the decision in the Antosko case or with Sarchuk T.C.J's conclusion in the Husain case that when the transferor is a non-resident, subsection 20(14) cannot apply.  We note that Sarchuk, T.C.J. stated that unless the transferor and transferee are both subject to income tax

under Part 1 of the Act, the subsection 20(14) exception (i.e. paragraph 20 (14)(b) is not available.  He did not say that in order to have an income inclusion pursuant to paragraph 20(14)(a) that both parties must be subject to income tax under Part 1 of the Act.

It is our view that in      24(1)    case, the relevant elements are in place such that

    (i)

24(1)

    (ii)

Summary

It is our opinion that paragraph 20(14)(a) applies to include the full amount of accrued and unpaid interest in the income of the transferor of a debt obligation when a resident of Canada assigns or transfers a debt obligation (other than those specifically excluded in the preamble to subsection 20(14)) on which the transferee has become entitled to receive such interest at some time after the date of such transfer. This is so regardless of whether (i) the resident transferor originally acquired the debt obligation from a non-resident transferor on which a portion of the interest accrued while held by such non-resident, or (ii) whether the resident transferor assigned or transferred the debt obligation to a non-resident transferee.

21(1)(b)

In light of the above discussion, we confirm our position outlined in our July 31, 1990 memorandum to you, concerning the possible reassessment of

24(1)

If you have any further questions on this matter please contact the writer.

ChiefLeasing and Financing SectionFinancial Industries DivisionRulings Directorate.