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.
931992
XXXXXXXXXX A.A. Cameron
(613) 957-8975
Attention: XXXXXXXXXX
October 27, 1993
Dear Sirs:
Re: Various Loan Programs
This is in reply to your letter of July 6, 1993 wherein you have asked for our views concerning the consequences which may arise under the Income Tax Act (the "Act") as a result of certain features of the farm loan programs of the Agricultural Credit Corporation of Saskatchewan (the "ACS"). In particular, your concerns relate to whether farm support payments ("FSP") arise in certain circumstances for which an information return (a "T-slip") must be prepared in accordance with information previously provided by Revenue Canada—Customs, Excise and Taxation.
You have made reference to three specific loan programs of the ACS which you have described as follows:
1. Capital Loan Program
Under this program, grants up to $8,000 were given
to farmers, from 1977 to 1983, who obtained loans.
These grants are forgiven at $500 per year.
2. Production Loan Program
Loans under this program were issued to farmers in
1986 at 6% for a three year term. All loans
outstanding in 1993 are now at 9.75% or Bank of
Montreal Prime Rate plus 2%.
3. Livestock Cash Advances
Pursuant to this program, interest free loans were
provided to farmers on a one year term until
August 1, 1992. After that date, these loans were
renewed for another one year term at Bank of
Montreal Prime Rate plus 2%. Certain of these
loans were interest free for part of 1993.
In addition, you have provided the following general information with regard to the loan programs of the ACS:
- all such loan programs have a number of loans in "Judgement" status which means that, by Court order, the interest rate on the relevant loan has been fixed at 5% per annum;
- amounts outstanding on loans under these programs are sometimes written off due to bankruptcy of the borrower, insolvency of an Estate, pursuant to a negotiated settlement, etc.;
- the ACS sometimes takes assets such as land, buildings, machinery and equipment to settle client accounts with such assets being assigned values to arrive at the amount of the write-off on the particular account; and
- the ACS may agree to forgive a portion of the interest outstanding (an "Interest Concession") when a client makes a payment (the client's account being reduced at the time the payment is made).
Our Comments
The final determination as to the provisions of the Act which may become applicable, at a given time with respect to a particular borrower under the various loan programs of the ACS, would have to be made after considering all of the facts relevant to the situation of that borrower at that time including consideration of the specific provisions of the provincial legislation governing the program in question which would become applicable at that time.
We will, however, provide general comments with regard to provisions of the Act which would appear to be particularly relevant to the following areas of concern raised in your letter.
Loans and Grants
The provisions of paragraph 12(1)(x) of the Act include in computing a taxpayer's income amounts received from a government or other public authority, in the course of earning income from a business, which
"... can reasonably be considered to have been received
(iii) as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement, or
(iv) as a reimbursement, contribution, allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an outlay or expense".
The income inclusion so arising would be to the extent that such amount is not excepted by the provisions of any of subparagraphs 12(1)(x)(v) through 12(1)(x)(viii) of the Act (such exceptions basically applying where the amount received has otherwise been included in computing the taxpayer's income, reduced his expenses, reduced the cost or capital cost of property or represented payment for the acquisition of certain property).
Although the provisions of paragraph 12(1)(x) of the Act came into force applicable with respect to amounts received after May 22, 1985, an exception was provided for amounts received after that date pursuant to the terms of an agreement in writing entered into before 4:30 p.m. Eastern Daylight Time on May 23, 1985.
It is our view that an amount received under the loan programs of ACS by a person carrying on a farming business as a grant, or any portion of such a loan which is a forgivable loan, would generally be required to be included in computing that person's income from farming pursuant to the provisions of paragraph 12(1)(x) of the Act unless such amount is received pursuant to the terms of an agreement in writing entered into before 4:30 p.m. Eastern Daylight Time on May 23, 1985. For these purposes, a loan would generally be a forgivable loan to the extent that the lender is committed to forgive the loan if certain conditions are met by the borrower. In our view, an income inclusion under paragraph 12(1)(x) of the Act with regard to a forgivable loan arises at the time the loan is granted. It should be noted that the provisions of paragraph 20(1)(hh) of the Act would provide a deduction with respect to any amounts included in computing the income of a farmer pursuant to the provisions of paragraph 12(1)(x) of the Act which are subsequently repaid by that farmer pursuant to a legal obligation to repay all or a portion of such amounts.
The amount of any grant or forgivable loan made by ACS to a borrower would, in our view, constitute a FSP for which the completion of a T-slip would be required.
Interest Rates on Loans
In our view, the fact that a borrower receives a loan under a program of the ACS which may have an interest rate that is lower (including potential interest free periods or loans in "Judgement" status) than commercial lending rates otherwise available to that particular borrower, would not, in and by itself, result in an amount which would constitute a FSP.
Loan Write-Off's / Interest Concessions
Where a borrower's debt is settled or extinguished without any payment or by the payment of an amount less than the principal amount of such debt, the provisions of subsection 80(1) of the Act may apply to reduce certain income tax deductions otherwise available to such borrower. It should also be noted that, pursuant to the provisions of subsection 80(4) of the Act, the granting of an Interest Concession will generally also result in a settlement or extinguishment of a debt to which the provisions of subsection 80(1) thereof may apply as described in the previous sentence.
In circumstances where ACS writes-off all or a portion of a loan or grants an Interest Concession, provided that it cannot be considered to have made a payment to the relevant borrower, such actions would not, in our view, give rise to a FSP.
Completion of T-slips
Pursuant to the provisions of subsection 205(1) of the Income Tax Regulations, information returns such as those to be required in respect of FSP are basically required to be filed "...on or before the last day of February in each year and shall be in respect of the preceding calendar year." Therefore, FSP made in a particular calendar year are to be reflected on a T-slip completed in respect of that calendar year, i.e., irrespective of factors such as the method utilized by the recipient of the FSP to compute income for purposes of the Act.
It is our understanding that where payments under a particular program are considered FSP, a T-slip will be required to be issued unless the total amount paid to the recipient in the year in respect of that program is less than $100. Further information concerning the completion of the T-slips may be obtained by contacting Jean-Claude Laporte of the Client Assistance Directorate at (613) 954-5377.
Concluding Comments
The foregoing comments concerning the consequences arising under the Act, with regard to certain features of the loan programs of the ACS and as to whether FSP arise as a result thereof, are expressions of opinion based upon the limited information available.
If we can be of further assistance in this matter, please do not hesitate to contact the writer.
Yours truly, for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
c.c. Jean-Claude Laporte Client Assistance Directorate
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