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.
Are borrowing costs deductible in the year for money-lenders
Must follow GAAP,
July 10, 1996
NORTH YORK TSO HEADQUARTERS
Industry Specialist Section C. Tremblay
Attention: Doug Mitchell
Deductibility of Borrowing Costs
We are writing in response to your memorandum of May 28, 1996, wherein you asked that we confirm the Department's position regarding deductibility of certain borrowing costs for money lenders.
The Scarborough Appeals Office is currently reviewing a file, which is the subject of this enquiry, and you stated that the facts are as follows:
XXXXXXXXXX that is a money lender, expensed certain loan costs in the year for tax purposes and amortized the deduction for accounting purposes. The money lender has based its position on paragraph 1 of IT-341R3 which states "for example, where money borrowed constitute a borrower's stock in trade, costs incurred in borrowing money to be used in a money lending business are not subject to the restrictions in paragraph 20(1)(e). Expenses incurred in these circumstances would normally be deductible as ordinary business expenses."
It should be noted that it is a question of fact as to whether the taxpayer is in the money lending business. Where the taxpayer is a money lender, they would be entitled to rely on paragraph 1 of IT-341R3. In such circumstances, it is our position that the timing of the deduction for tax purposes should generally be determined in accordance with generally accepted accounting principles ("GAAP") unless a specific provision of the Act requires a departure therefrom. The general rule as stated in West Kootenay Power & Light Company Limited v The Queen (92 DTC 6023) regarding the method of computing income for the purposes of the Act is that whichever method presents the truer picture of a taxpayer's revenue, which more fairly and accurately portrays income, and which matches revenue and expenditure, if one method does, is the one which must be followed. The truer picture approach was also adopted in Maritime Telephone and Telegraph Company Limited v The Queen (92 DTC 6191) and in Canderel Limited v The Queen (95 DTC 5101).
Our response to the Scarborough District Office dated December 4, 1992 (file # 921684) re the timing of the deduction of debt issue costs and loan origination costs for tax purposes was that GAAP should govern unless the Act requires a departure therefrom.
In our view, where GAAP permit both the amortization and the immediate write off of the expense, the "truer picture" approach to the determination of profit matching of expenses and revenues through amortization will usually be the correct treatment. Your memorandum indicates that the corporation has not provided any evidence that the method it is using for tax purposes results in a "truer picture" of its profit than the method it is using for financial statement purposes.
US accounting standards FAS 91, issued December 1986 and effective December 15, 1987, and CICA accounting guidelines, effective October 1987, both require all fees and costs associated with lending activities to be recognized in conjunction with ancillary fees over the term of the loan.
Further, the case of Canada Permanent Mortgage (71 DTC 5409) may no longer be relevant. Although the court held that stock in trade is borrowed money and any expense to acquire such stock in trade is deductible, the case occurred prior to introduction of paragraph 20(1)(e) of the Act and prior to the introduction of clear accounting policies as stated above.
In Metropolitan Properties v the Queen, (85 DTC 5128), the court found that GAAP should normally be applied for taxation purposes. It is only where it is justified or required by the legislature that GAAP need not be followed. The fact that there is nothing in the Act to prevent such deductions from being treated as current expenses and deducted as such from income in the year in which they are made is not sufficient justification for departing from GAAP principles in dealing with them in this way. It is the converse argument which should be adopted to the effect that these principles should only be departed from if something in the Act specifically requires or authorizes this. Moreover, the Department of Finance is of the view that money-lenders should be following GAAP with respect to such expenses.
Although money lenders should be following GAAP with respect to such expenses, in our view, there is nothing that would restrict the use of paragraph 20(1)(e) of the Act to non money-lenders. Accordingly, where some money-lenders have elected to utilize 20(1)(e) which provides for a five year amortization period vs a GAAP amortization period which might be for a longer period, Audit's decision to accept the 5 year amortization period appears reasonable.
We trust our comments will be of assistance to you.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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