22 July 1993 Internal T.I. 9316457 F - Interest Rate Caps

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.

July 22, 1993

Attention:  Doug Mitchell 

Banking SpecialistInformation Slips

RE:  Interest Rate "Caps"

We are writing in response to your memorandum of May 20, 1993 wherein you requested our views as to whether a financial institution which makes payments pursuant to an interest rate protection agreement (an "interest rate cap") would be required to file information returns (specifically, a "T5 Supplementary - Statement of Investment Income") with respect to such payments. XXXXXXXXXX

It is our understanding that, pursuant to an interest rate protection agreement, the financial institution will agree with the purchaser of the interest rate cap that, in the event that interest rates rise above a contractually agreed upon level, the institution will make a payment to the purchaser equal to the amount by which the then current interest rate exceeds the agreed upon level times a predetermined notional principal amount. In circumstances in which the notional principal amount is referrable to the principal amount of an outstanding loan obligation of the purchaser, this payment would, effectively, limit the interest costs associated with the loan to the level contractually agreed upon in the agreement notwithstanding that the payment made by the financial institution would not, in itself, constitute "interest". We would also note that the notional principal amount stipulated in the agreement need not be referrable to a debt, if any, of the purchaser.

It is our view that any payments received by a party to an interest rate cap from the vendor bank would not constitute an amount as described in section 201 of the Income Tax Regulations (the "Regulations") and, consequently, a T5 Supplementary need not be filed in respect thereof. Further, it is our view that such amounts would not constitute an amount described in section 200 of the Regulations which would otherwise entail the filing of an information return "T4A - Statement of Pension, Retirement, Annuity or Other Income".

We would emphasize, however, that any payments received pursuant to such an agreement would, for purposes of the Income Tax Act, constitute income in the hands of the recipient notwithstanding the absence of a requirement to file the aforementioned information returns.

We trust that this is the information which you require and will assist in your response to the taxpayer concerned.

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Section Chief Financial Institutions Section Financial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch