26 June 1996 External T.I. 9621595 - REQUIREMENT TO CHARGE INTEREST

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:

Whether there should be a minimum interest rate on a mortgage taken back on the sale of farm property. In this case 1% for a term of 10 yrs

Position:

The Act does not require a minimum interest on debts arising from the sale of capital property. However, should the selling price be inflated by an amount in respect of interest, that portion would be treated as interest.

Reasons:

Whether there is an interest amount included in the selling price would be a determination of fact to be made based on the particular circumstances of an actual transaction.

		962159
XXXXXXXXXX	A.M. Brake

June 26, 1996

Dear XXXXXXXXXX:

Re: Low Interest Mortgage

This is in reply to your letter of June 8, 1996, wherein you outlined a proposed transaction in respect to the sale of your farm. The facts relating to the sale include the following:

Selling price$230,000
Less: Downpayment 20,000

Balance owing$210,000 *

*You intend to take back a mortgage for this amount, charging interest at a rate of 1% per annum. The purchaser will make monthly payments of $1,000 including principal and interest, for a ten year period.

You asked if there was a minimum interest rate that you have to charge.

The fact situation which you set out is quite specific and it appears that it may relate to definite contemplated transactions. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling request should be submitted. We do, however, provide the following comments for your information.

Our Comments

You state that you were advised earlier during a telephone conversation (Guglich/XXXXXXXXXX) that a 1% interest rate would be satisfactory for income tax purposes. In this regard, generally, the Income Tax Act (the "Act") does not require that interest be charged on a debt such as the $210,000 mortgage that you will be taking back from the purchaser. Provided there is no interest factor built into the total selling price, we would not consider any part of the $230,000 to be in respect of interest. However, if it could be shown that the property was worth only, say, $180,000 and that the selling price was inflated by an interest factor of, say, $50,000 which was built into the selling price, the Department would take the view that the interest on the mortgage would be 1% plus the $50,000 inflated selling price of the property.

Our comments should not be interpreted as confirmation of or disagreeing with the accuracy or treatment of the values or percentages referred to herein and neither should it be interpreted as confirming that a farming business has been carried on at anytime as these are questions of fact the determination of which can only be made when all the facts are known.

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch