15 January 1993 Income Tax Severed Letter 9236060 - Prepayment 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.

1993 Manitoba Institute/Bar
Revenue Canada Round Table - Question 13

Author: Steve Tevlin

Date: January 15, 1993

Document Type:
Code 7

T236 #: 923606

Section of Act:
18(9.1)

Question

• (a) Where a financial institution lender receives payments from different borrowers, in each case as consideration for a reduction in the rate of interest payable on a debt obligation or as a penalty or bonus payable by reason of the repayment of all of or part of the principal amount of a debt obligation, will the lender in calculating its income for subsequent years consider such payments on an individual loan basis or an aggregate basis?
• (b) In what years may the payor deduct the expense as determined pursuant to subsection 18(9.1)?

Department's Position

• (a) Subsection 18(9.1) applies to each separate transaction involving a payment of a bonus or penalty by a borrower to a lender in respect of a debt obligation.
• (b) Generally the penalty or bonus payment made by the borrower is compensation required by the lender for interest forgone over the entire term of the obligation and should therefore be deducted on a straight-line basis over the period during which the obligation is outstanding or would have remained outstanding but for the prepayment. Pursuant to clause 18(9.1)(f)(ii)(B) such deduction will be available to the extent that the property or property substituted therefor is used by the borrower in that year for the purpose of earning income therefrom or for the purpose of earning income from a business.