21 October 1993 Income Tax Severed Letter 9325325 - Mortgage Pay-out Penalties

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.

                                           932532
XXXXXXXXXX                                 C. Tremblay
                                           (613) 957-2744

Attention: XXXXXXXXXX

October 21, 1993

Dear Sirs:

Re: Mortgage Pay-Out penalties

This is in reply to your letter of September 2, 1993, concerning subsection 18(9.1) of the Income Tax Act (the "Act") with respect to penalty payments made in order to pay off a mortgage, or reduce the interest rate on the mortgage, prior to the sale of the mortgaged capital property.

You are concerned that because the payment is made in order to facilitate the sale of the property, the payment may be a cost of disposition rather than a payment made "in the course of carrying on a business or earning income from property" for purposes of subsection 18(9.1) of the Act.

Our Comments

In order to be characterized as interest under subsection 18(9.1), a penalty or rate-reduction payment must be made in the course of carrying on a business or earning income from property and must be in respect of borrowed money used in the course of such activity or an unpaid balance of the purchase price, in respect of property or substituted property.

In a situation where the property is disposed of, it is our view that the payment is made or incurred for the purpose of making the disposition and subparagraph 40(1)(a)(i) of the Act would be more applicable. If, however, a substituted property is acquired, the provisions of subsection 18(9.1) of the Act may have application.

The foregoing represents our general views with respect to the subject matter of your letter, however, the facts of a particular situation may result in a different conclusion. As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R2 they are not binding on the Department.

We trust our comments in this matter are helpful.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch