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:
Is interest on unpaid claims deductible on an annual basis as provided for in section 143 of the Bankruptcy and Insolvency Act
Position:
Not deductible until it is determined that a surplus exists after the payment of all claims - prior to that time, it is a contingent liability
Reasons:
Plain reading of paragraph 18(1)(e) and section 143 of Bankruptcy and Insolvency Act.
961956
XXXXXXXXXX J.P. Dunn
Attention: XXXXXXXXXX
June 25, 1996
Dear Sirs:
Re: Deductibility of Interest from Date of Bankruptcy
We are writing in response to your correspondence of May 30, 1996 with respect the deductibility of accrued interest pursuant to paragraph 20(1)(c) of the Income Tax Act (the "Act") by the estate of a bankrupt on proven, but unpaid, bankruptcy claims.
As you have noted in your correspondence, section 143 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c.B-3, provides that;
Where there is a surplus after payment of all the claims as provided in sections 136 to 142, it shall be applied in payment of interest from the date of bankruptcy at the rate of five per cent per annum on all claims proved in the bankruptcy and according to their priority.
As the above legislation provides for the payment of interest on all of the proven claims, it is your view that such interest should be deductible by the bankrupt estate in computing its income for tax purposes for each taxation year of the estate subsequent to the date of bankruptcy. Although such interest may be computed from the date of bankruptcy, it is our view that, until the time that it has been determined that a surplus does exist subsequent to the payment of all claims, the deduction for income tax purposes would constitute a contingent liability of the estate and would, consequently, not be deductible prior to that time by virtue of paragraph 18(1)(e) of the Act. This view is based upon the wording of the above provision which provides for the payment of interest only upon the existence of a surplus after payment of all claims.
We trust that this is the information which you require.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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