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.
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File: 7-921148 |
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Author: S.J. Tevlin |
Prairie Provinces Tax Conference
May 19 & 20, 1992
DRAFT/EBAUCHE Question 16
On a sale of shares there is an effective date and a subsequent legal closing date. Ownership of the shares does not pass to the purchaser until the legal closing date. The sales agreement obliges the purchaser to pay to the vendor in addition to the sale proceeds an additional amount. The sales agreement calls this additional amount "interest" and calculates it as the product obtained by multiplying the purchase price times a chartered bank's prime interest rate pro rated for the number or days from the effective date to the legal closing date. No debtor/creditor relationship exists between the vendor and purchaser until the closing date.
Is the amount calculated as "interest" by the formula deductible, pursuant to subparagraph 20(1)(c)(ii) of the Act, as an interest expense to the purchaser or is it an addition to the cost of the acquired shares?
Department's Position
The definition of "interest", as adopted by the Federal Court-Trial Division, in Miller v. The Queen, 85 DTC 5354, is an amount in respect of which the following three criteria must be satisfied: (1) it must be calculated on a (day by day) accrual basis; (2) it must be calculated on a principal sum or a right to a principal sum; and (3) it must be compensation for the use of the principal sum or the right to the principal sum. It would appear that the third criterion would not be satisfied in the situation described, on the assumption that there would be no principal amount owing by the purchaser until the legal closing date and as such no right to a principal amount by the vendor until that time. As such the "interest" component would be part of the purchase price, rather than consideration for money due, owing to or belonging to the vendor.
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