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:
What is timing of interest income and expense ?
Position:
In accordance with subsection 12(3) or 12(4) and 20(1)(c)
Reasons:
Debt oblighations
961120
XXXXXXXXXX C. Tremblay
Attention: XXXXXXXXXX
April 24, 1996
Dear Sirs:
Re: Interest Income and Expense
This is in reply to your letter of March 4, 1996, wherein you requested our comments with regards to two hypothetical fact situations.
The situations that are described appear to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. If, however, your request describes completed transactions involving specific taxpayers, your questions should be directed to your District Tax Services Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.
Where an individual holds an interest in a debt obligation, subsection 12(4) of the Act will apply and the individual will be required to include in computing income for the year the interest that accrued to the end of the anniversary day of the obligation, to the extent the interest was not otherwise included in computing income for the taxation year or a preceding taxation year. Accordingly, interest accrued on an obligation up to each anniversary day of the obligation must be included in income in the taxation year in which the anniversary day falls. Interest accrued after the anniversary day of any obligation, but within the same taxation year of the individual would be included in income of the following taxation year.
If the recipient of a promissory note is a corporation, generally subsection 12(3) of the Act will require the corporation to include all the interest that accrued to it to the end of its taxation year.
A deduction pursuant to paragraph 20(1)(c) of the Act can be taken when the amount is either paid in the year or payable in respect of the year. In order for the interest to be deductible by an accrual basis taxpayer, as is the case for a corporation, the interest must have accrued and become payable.
An amount is considered payable when there is an absolute and unconditional legal liability to pay, even though payment may not be due. Interest will be deductible by an accrual taxpayer only when the interest has become payable and only for the year in respect of which it is payable. If interest is payable in a year subsequent to the year in which it accrues, the entitlement or right to make a deduction will arise only in such subsequent year.
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 given, are met on a yearly basis and thus meet the definition of interest pursuant to paragraph 20(1)(c) of the Act.
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
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1996
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1996