23 September 1996 Ministerial Letter 9629498 - PARTIAL PAYMENT REC'D FOR GIC & ACCRUED 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.

ADM'S OFFICE								ADM 962261
RETURN TO 15TH FLOOR, ALBION TOWER
RULINGS DIRECTORATE

September 23, 1996

XXXXXXXXXX

Dear XXXXXXXXXX:

Mr. Don Drummond, Senior Assistant Deputy Minister of the Tax Policy Branch at the Department of Finance, has asked me to respond to your concerns regarding the tax treatment of amounts you received in respect of a XXXXXXXXXX Guaranteed Investment Certificate (the "GIC").

I understand that you purchased the GIC in

XXXXXXXXXX

The determination of whether a partial payment on a debt represents interest or principal can only be determined by an xamination of the specific facts of each case. However, unless the facts indicate otherwise, partial payments are generally applied first to discharge interest. As there is no indication to the contrary, the payments you received in respect of the GIC should, therefore, first be applied to interest, with the remainder applied to principal. As the amounts that you have received to date exceed the accrued interest on the GIC, any loss you may incur will relate to the principal and, as such, will be treated as a capital loss.

As is the case with capital gains, seventy-five percent of a capital loss is relevant for income tax purposes. Consequently, in general terms, in the year a capital loss is realized, it may be deducted against the capital gains for the year. Any excess may generally be carried back three years, or forward indefinitely, and applied against capital gains of those years.

It should also be noted that, in circumstances such as this one, the capital loss will be considered to have been realized at the end of the year in which the debt owing to you becomes a bad debt, provided you elect in that year's income tax return to have subsection 50(1) of the Income Tax Act apply to the debt. The time at which a debt becomes a bad debt is a question of fact and any decision made must be dependant upon the circumstances in each case. Generally, however, a debt will be uncollectible at the end of a particular taxation year if the creditor has exhausted all legal means of collecting it, or where the debtor has become insolvent and has no means of paying it. Since, as indicated above, you expect to continue to receive payments from XXXXXXXXXX on account of the GIC, any capital loss resulting from the GIC cannot be realized until it is established that payments will no longer be received. Based on the above information, it appears that the capital loss will be recognized in 1997.

I trust I have addressed all of your concerns.

Yours sincerely,

Denis Lefebvre
Assistant Deputy Minister
Policy and Legislation Branch

M. Azzi
957-8972
September 12, 1996