27 May 1998 Internal T.I. 9811140 - DEDUCTIBILITY OF ACCRUED UNPAID 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: Is accrued unpaid interest still deductible in light of the Barbican decision?

Position: Yes, if it qualifies as interest, meeting the 3 criteria espoused in Brenda J. Miller v. The Queen and if the amount to be deducted is paid or payable in respect of the year for which the deduction is sought (i.e. cannot be a contingent obligation).

Reasons: Consistent with the jurisprudence and our reading of the legislation.

SPEAKING NOTES FOR RICK BISCARO FOR GOODMAN PHILLIPS & VINEBERG & CHARTERED ACCOUNTANTS OF ONTARIO ROUND TABLE, MAY 27, 1998

Query

Is accrued unpaid interest still deductible? Impact of the Barbican decision?

Notes

Yes, accrued unpaid interest is still deductible if certain prerequisites are met. Specifically, at the 1989 Corporate Management Tax Conference, the Department noted that on the basis of Brenda J. Miller v. The Queen (85 DTC 5354), in order to qualify as interest, an amount must satisfy all three of the following criteria:

(i) it must be calculated on a daily accrual basis;
(ii) it must be calculated on a principal sum or a right to a principal sum; and “
(iii) it must represent compensation for the use of the principal sum or the right to the principal sum.

Further, the amount to be deducted must be paid or payable in respect of the year for which the deduction is sought.

In the Barbican case, the Federal Court of Appeal found that the amounts sought to be deducted were not payable in resepct of the year because the payment of the amounts was dependant upon a contingency being satisfied prior to the payment.

Overview of the facts in the Federal Court of Appeal decision in Barbican Properties Inc. v. The Queen (97 DTC 5008. Leave to appeal to the Supreme Court of Canada was denied on June 19, 1997):

the taxpayer borrowed money to buy income-producing properties. Under the terms of the bank loans, the taxpayer was required to pay interest at a stipulated rate which accrued daily and was payable monthly. If the net operating revenues from any property in any year were insufficient to cover the interest payable in that year, the taxpayer was entitled to defer payment of that interest. Any deferred interest was due and payable at the latest upon the maturity of the loan, or upon the sale of the relevant property, whichever occurred first. The Court agreed with Revenue Canada that the deferred interest expense was not paid or payable in respect of the years for which they were claimed to be deductible, “pursuant to a legal obligation to pay interest” in accordance with paragraph 20(1)(c) of the Act. In addition, such amounts were non- deductible contingent liabilities within the meaning of paragraph 18(1)(i).