1 May 1992 Income Tax Severed Letter 9203135 - Penalties Onpayment of Debt

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: PENALTIES ON PAYMENT OF DEBT SECTION: 18(9.1)]

920313
C. Tremblay
(613) 957-2744

Attention: XXX

May 1, 1992

Dear Sirs:

Re: Subsection 18(9.1) of the Income Tax Act (the "Act")

This is in reply to your letter of January 17, 1992, addressed to the Vancouver District Office. You describe a situation where a Canadian corporation repayed a bank loan and incurred an early repayment penalty. It received the funds from proceeds of a long term debenture.

You seek our views as to whether the payment of the penalty is an exception as contemplated in paragraph 18(9.1)(a) ie. "... may reasonably be considered to have been made in respect of the extension of the terms of or substitution or conversion of a debt obligation..."

In your letter you have outlined what appears to be an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of District Taxation Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide you with the following general comments which we hope will be of assistance to you.

Our Comments

Subsection 18(9.1), which is of retroactive effect, now governs, among other things, the treatment of bonuses or penalties paid on the early redemption of debt obligations (to the extent the bonus or penalty relates to, and does not exceed, interest on the debt obligation that would have been paid/payable in the future were it not for the early repayment).

Where subsection 18(9.1) of the Act applies to an amount, such amount is deemed to have been paid as interest on the debt obligation. We note, however, that for purposes of computing the payer's income, such deemed interest is not necessarily deductible in the year the penalty or bonus is paid. Rather, pursuant to paragraph 18(9.1)(f) of the Act, the amount is deemed to have been paid or payable in the taxation year in which the actual interest would have otherwise been paid or payable were it not for the early repayment.

It is a question of fact whether the payment may reasonably be considered to have been made in respect of the substitution of a debt obligation (the long term debentures) for another debt obligation, in which case new subsection 18(9.1) would not apply. For a discussion of discounts, premiums and bonuses on debt obligations where subsection 18(9.1) does not apply, see Interpretation Bulletin IT-114, in particular paragraph 25.

The forgoing represents our general views with respect to the subject matter of your letter, however, the facts of a particular situation may result in a different conclusion. As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R2 they are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergoverrunental
Affairs Branch