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.
Principal Issues:
18(9.1) Is a Present Value deduction available or is only straight line available?
Position TAKEN:
YES - present value deduction may also be used provided it is spread over what would have been the remaining term of the obligation.
Reasons FOR POSITION TAKEN:
18(9)(b) excludes interest from its application.
October 23, 1995
HEADQUARTERS HEADQUARTERS
Appeals Branch C. Tremblay
(613) 957-8953
Attention: J. Yu
950376
XXXXXXXXXX
We are writing in response to your request to examine the calculation method pursuant to subsection 18(9.1) of the Act, specifically whether a present value method of amortization can be used.
Although in our previous reply to the Calgary District Services Taxation Office, we promoted the straight-line method of amortization as being the only method acceptable in determining a taxpayer's income, we agreed to review the facts again to determine whether or not a present value method of amortization could be selected pursuant to subsection 18(9.1) of the Act.
In our view, subsection 18(9.1) of the Act requires that the penalty payment must not exceed the "value" at that time of an amount that, but for the payment, would have been paid or payable as interest. The condition is intended to apply to the total interest otherwise payable for the term of the obligation and to each taxation year in which the taxpayer claims a deduction. If it satisfies the tests, the amount is deemed, for all purposes of the Act, to be interest paid by the borrower and received by the lender. The intention of subsection 18(9.1) of the Act requires that the deduction of the penalty or bonus be spread over what would have been the remaining term of the obligation.
The Department of Finance has indicated that subsection 18(9.1) of the Act is worded in such a way as to allow for an interpretation of the present value method of amortization, provided that the discount rate is reasonable and that the amount reasonably relates to the interest of the remaining term and in the particular year and the amount does not exceed the value of the interest that would have been paid in respect of the remainder of the term and in the particular year.
We are in agreement with the above interpretation. Accordingly, in our view, both the straight line and the present value method of amortization are acceptable for the purposes of subsection 18(9.1) of the Act.
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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