23 March 1992 Income Tax Severed Letter 9203707 - Charitable Foundations

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.

March 23, 1992

Mr. Les Delorme                        Business & General
Chief of Audit                           Division
Saskatoon D.O.                         H. Woolley
                                       (613) 957-2139
                                       920370

               24(1)

This is in reply to your memorandum dated January 30, 1992 in which you requested our comments with respect to the application of paragraph 189(1)(b) of the Income Tax Act (the "Act"). We also acknowledge receipt of a memorandum dated January 4, 1991 written by Ms. Donna Walsh of the Department's Charities Division. The facts of this case are outlined in Ms. Walsh's memorandum and will not be repeated here. As previously discussed with you and Ms. Walsh the only issue to be resolved with respect to this file is whether, for the purpose of paragraph 189(1)(b) of the Act,

                            24(1)

The Concept of Payment

To describe an act of payment the Act uses various words such as "paid", "expended" and "disbursed". These words are synonyms. Often the word "paid" is used in conjunction with another word, for example, paragraph 20(1)(c) of the Act refers to "an amount paid in the year or payable in respect of the year..." and the preamble to subsection 212(1) of the Act refers to "pays or credits". Neither "payable" nor "credit" is synonymous with "paid" and an amount that is "payable" or "credited" would not fall within the concept of payment.

Payment may be made in different ways. It may be made in cash, in kind, or by way of set-off; it may be made directly or indirectly. Also in certain circumstances, the Act may deem a payment to have been made by a taxpayer when, in fact, no such payment has occurred (ie paragraph 84(3)(a) of the Act may deem a dividend to be paid when a corporation redeems its own shares).

Set-off is a common law concept. Halsbury's Laws of England (4th edition, volume 9) states, "...settlement of accounts by which items on one side are agreed to be set-off against items on the other side (with any necessary adjustments in cash) amounts to payment of the sums stated on both sides of the account...". Recording journal entries that establish an amount payable and an amount receivable does not constitute set-off.

Under common law principles, payment involves the performance of the obligation, and not merely its discharge. Performance requires that the debtor actually part with something, other than his promise to pay in the future, such as cash, a non-post-dated cheque, or other goods or services. Where a debtor gives a security or other evidence of indebtedness to a creditor, he has not parted with anything. Also, under common law, if a debtor gives a negotiable instrument to his creditor in performance of a contractual obligation, the creditor can accept it as collateral security for discharge of the obligation or as absolute satisfaction of the obligation. The recording of journal entries in the ledgers of two separate entities does not constitute a negotiable instrument or other security.

Under section 76 of the Act, a creditor who receives a security or other evidence of indebtedness in satisfaction of an income debt is required to include the value of the security in his income. However, section 76 does not deem the debtor to have paid the amount and therefore does not alter the common law rules as to what constitutes payment.

Accordingly, it is our view that 24(1) may not be considered to have "paid" interest to the 24(1) on its outstanding loan where it and the 24(1) merely recorded journal entries in their ledgers.

We trust our comments are of assistance.

Yours truly,

E. Wheeler for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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