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.
Principal Issues:
Whether subsection 78(1) would apply to a taxpayer who uses the "cash method", in respect of interest owed by him to a taxpayer who is on the accrual basis.
Position:
No.
Reasons:
Subsection 78(1) requires, among other things, that only an unpaid "deductible" expense or outlay of a taxpayer be included in the taxpayer's income. However, as an expense can only be deducted by a cash-method taxpayer under paragraph 28(1)(e) when it is paid, the expense would only be deductible at that time.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
Re: Section 28 and Subsection 78(1) of the Income Tax Act (the "Act")
This is in reply to your letter dated January 22, 1997 in which you requested a technical interpretation of subsection 78(1) of the Act, as it applies to a taxpayer who elects to report income under the "cash method" pursuant to section 28 of the Act ("cash basis taxpayer").
Among other things, subsection 78(1) of the Act applies to a "deductible" outlay or expense owed by a taxpayer.
In computing income under the cash method for a taxation year, a taxpayer is required to deduct under paragraph 28(1)(e) of the Act, only amounts described as having been paid in the year. Accordingly, for the purpose of subsection 78(1) of the Act, it is our opinion that the amount of accrued interest on a debt obligation that is owed but unpaid by a cash basis taxpayer would not be considered "deductible" until the amount is paid by the taxpayer.
As indicated in paragraph 22 of Information Circular 70-6R3, this opinion is not an advance ruling and, accordingly, it is not binding on Revenue Canada.
Yours truly
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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