20 June 1995 External T.I. 9506765 - INTEREST DEDUCTIBILITY

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:

Interest deduction for accrued interest

Position TAKEN:

General opinion

Reasons FOR POSITION TAKEN:

Not enough facts - live deal should be Ruling request

			950676
XXXXXXXXXX		C. Tremblay

Attention: XXXXXXXXXX

June 20, 1995

Dear Sirs:

Re: Interest deduction

This is in reply to your letter of March 6, 1995, concerning our views on the interpretation of paragraph 20(1)(c) of the Act to the fact situation described in your letter.

Your letter appears to refer to a factual situation involving a specific taxpayer, accordingly your questions should be directed to your District Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. However, if this is a proposed transaction, this matter would be more appropriately the subject of an Advance Income Tax Ruling. We are, however, prepared to provide you some general comments.

Before a sum can be characterized as interest and deductible under paragraph 20(1)(c) of the Act, it must meet three criteria

1) it must be calculated on a day by day accrual basis,

2) it must be calculated on a principal sum, and

3) it must be compensation for the use of the principal sum or the right to the principal sum.

Further, there must be a legal obligation to pay, as opposed to simply a contingent liability or a discretionary payment. The payments must also be paid in the year or payable in respect of the year depending upon the method regularly followed by the taxpayer in computing his income and the amount must be reasonable. Also, there must also be a bona-fide borrower-lender relationship and the borrowed funds must be used for the purpose of earning income from a business or property.

It is a question of fact whether these tests, in the example you give, are met on a yearly basis and thus meet the definition of interest pursuant to paragraph 20(1)(c) of the Act.

Moreover, paragraph 20(1)(d) of the Act permits the deduction of compound interest, that is, interest paid on interest owed, where the interest owed is deductible under paragraph 20(1)(c) of the Act, and refers only to paid and does not include interest "payable".

The above comments are only expressions of opinion on the application of the Income Tax Act to the hypothetical example given and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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