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.
1992 Canadian Tax Foundation Conference
Author: Claude Tremblay November 25, 1992
Treatment of Interest Accrued on Transferred Debt
Question 1
The Court of Appeal recently dismissed the appeal of Antosko. The court clearly limited its decision to the particular facts and emphasized that the transferor had not received payment for the interest accrued on the transferred debt to the date of transfer and the intention of the transferee was not to purchase accrued interest but to take control of a corporation in distress with a view to making its business profitable. The court recognized that the purpose of subsection 20(14) was to apportion income between the transferor and the transferee "so as to avoid taxation of the same amount in both the hands of the transferor and the transferee. The effect is that, ordinarily, interest which accrues before the transfer date becomes taxable in the hands of the transferor only and that the transferee is taxable on the interest which accrues after that date."
In light of the decision of the Court of Appeal, does the Department accept that a deduction equal to the amount of interest accrued to the transferor is available to the transferee in the following circumstances:
(a) a taxable transferee acquires a debt obligation from a
non-taxable transferor, settlement for which includes
payment in an amount equal to the accrued interest;
(b) a taxable transferee acquires a debt obligation trading
on the public market. Settlement for the purchase price
includes an amount equal to the accrued interest.
Answer 1
The taxpayer who acquires an interest-bearing debt obligation is entitled to a deduction for a portion of the interest included in income if the requirements in subsection 20(14) of the Act are met. A requirement is that paragraphs 20(14)(a) and 20(14)(b) of the Act not be read independently. The word "and" at the end of paragraph (a) and the object and spirit of the subsection support the construction. This position was favoured in H. Boris Antosko and Stanley F. Trzop v. Her Majesty the Queen 92 DTC 6388 (FCA). Consequently, our position as was stated in the answer to question 13 at the 1990 Round Table remains the same.
Where a taxable transferee acquires a debt obligation from a non- taxable transferor who is exempt under section 149 of the Act, a deduction may be available if an amount has been included in computing the transferor's income under paragraph 20(14)(a) of the Act in respect of interest that has accrued on the debt obligation.
Where a taxable transferee acquires a debt obligation trading on the public market and settlement for the purchase price includes an amount equal to the accrued interest, it is a question of fact whether the requirements of subsection 20(14) of the Act have been met.
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