24 March 1998 External T.I. 9806325 - INTEREST INCOME SUBJECT TO A CONTINGENCY

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:

How to report interest income the payment of which is subject to a contingency. What about when a T-5 has been issued for the full amount of the interest ?

Position:

Not receivable until the contingency has been satisfied. May be able to claim a bad debt reserve in respect of amounts included in income.

Reasons:

Reading of the legislation

XXXXXXXXXX 980632
J. P. Dunn

March 24, 1998

Dear Sir:

Re: Taxable Accrued Interest

We are writing in response to your facsimile correspondence of March 12, 1998 regarding the reporting of accrued interest income on bonds. As we understand, the payment of the interest is dependent upon the issuer having fulfilled certain conditions.

Although we are unable to comment directly on the particular case presented in your corespondence, we would offer the following general comments relative to the reporting of interest income. Generally, an individual reports interest income by virtue of paragraph 12(1)(c) of the Income Tax Act which requires that the individual include in income for a year “any amount received or receivable in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer’s profit) as... interest to the extent that the interest was not included in computing the taxpayer’s income for a preceding year”. In circumstances in which a condition must be fulfilled by the debtor prior to payment, it is the view of the Department that no amount of interest would be considered to be receivable by the taxpayer until that condition is fulfilled. Where the condition has been fulfilled but payment has not yet been made, the amount would still be required to be included in the income of the creditor, however a reserve for a doubtful debt may be available pursuant to paragraph 20(1)(l) of the Income Tax Act if, at the end of the taxation year in question, the ultimate payment of the interest by the debtor is doubtful.

We would caution however, that, depending upon the exact terms of a debt obligation, the previous comments may or may not be applicable. Accordingly, we would suggest that, in order to obtain more comprehensive information regarding your particular situation, you may wish to contact your local taxation services offices which, when provided with the complete details of your situation, will be able to more completely respond to your concerns.

We trust that our comments are of assistance.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch