31 July 1990 Income Tax Severed Letter ACC9368 - Disposition of Income Debentures

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.

TORONTO DISTRICT OFFICE        HEAD OFFICE
     P. St. Laurent                 Rulings Directorate
     A/Chief of Audit               Financial Industries Division
                                    Peter Lee
     Attention:  John Cunningham    957-2845
                 International Tax Group
                 1
97-1-1                      
                                      7-900312

                                      EACC 9368

Subject:                24(1)
          Disposition of Income Debentures

On April 4, 1990 your letter of December 20, 1989 to
International Audits Division regarding
                              24(1)
Our understanding of the facts is as follows:

1.
2.                            24(1)

                              24(1)
3.

                              24(1)
4.

5.

                              24(1)

6.
7.
                              24(1)

Your Opinion

                              24(1)
Our Opinion

                              24(1)

12.      The term "income debenture" is defined in subsection
         248(1) of the Act to mean "...a debenture in respect of
         which interest or dividends are payable only to the
         extent that the issuing corporation has made a profit
         before taking into account the interest or dividend
         obligation..."  In Timagami Financial Services Limited
         v. Her Majesty The Queen, 
81 DTC 5064, affd
82 DTC 6268
         (FCA), Gibson, J., commented that "... the word `payable'
         ... is synonymous with due, a present obligation to pay
         ...  24(1)

                              24(1)

14.      Pursuant to subsection 12(3) of the Act, for taxation
         years commencing after October 28, 1980, any interest
         accrued to the end of the year to a corporation on a
         debt obligation must be included in its income for the
         taxation year except to the extent that any such
         interest was included in its income for a previous
         taxation year.  

                              24(1)

15.      Subsection 20(14) of the Act provides that accrued
         interest to the date of sale of a debt obligation is
         included in the income of the transferor and an
         offsetting deduction is permitted to the transferee to
         the extent that the amount was included as interest in
         computing his income for the year.

                              24(1)

         Subsection 20(14) of the Act requires recognition of
         interest accrued "...for a period commencing before the
         time of transfer and ending at that time that is not
         payable until after that time ..."  These words are
         broad enough to include a situation wherein no interest
         has been paid to the date of assignment or transfer.

16.
                              24(1)

         Stated in paragraph 6 of Interpretation Bulletin

IT-401R
, the transferor of an interest-bearing
         obligation must include an amount as interest in
         computing the transferor's income in order that the
         transferee may get a deduction by virtue of paragraph
         20(14)(b) of the Act.

         The position in paragraph 6 of 
IT-401R
 is supported by a
         recent court case, Her Majesty The Queen v. H. Boris
         Antosko and Stanley F. Trzop, 
90 DTC 6111 (FC-TD),
wherein
         the Court decided that paragraphs (a) and (b) of
         subsection 20(14) of the Act had to be read together as
         whole.

                              24(1)
17.      Subsection 20(21) of the Act permits a deduction for
         over accrued interest on debt obligation in a taxation
         year in which the debt obligation is disposed of at its
         fair market value.
                              24(1)
18.      Paragraphs 3 and 4 of 
IT-410R
 discuss the application of
         subsection 20(14) to the transferor.  Paragraph 3 of
         that bulletin states: "...where the assignor of a
         mortgage accepts consideration equal to, say, 50% of the
         total of the principal amount outstanding and the
         accrued interest, because the realization of any
         principal or interest is uncertain, the assignor is
         obliged to include in income the full amount of interest
         accrued from the interest date previous to the transfer.
         These paragraphs do not address the possible application
         of subsection 20(21) of the Act by 1980-81-82-83, c.140,
         s. 12(9).  We will notify the Publications Division of
         this omission. 

                              24(1)

We hope our comments are of assistance to you. Should you have any questions, please contact Peter Lee. Chief Leasing and Financing Section Financial Industries Division Rulings Directorate

c.c. Mr. D.L. Cumming Chief, Policy and Research Section (West) International Audits Division Audit Programs Directorate