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.
July 2, 1985
MONTREAL DISTRICT OFFICE R. Dore, Director
Remi St. Louis Audit Review Section
HEAD OFFICE Non-Corporate Ruling Division D.B. Delorey 995-2455
XXXX
Subparagraph 212(1)(b)(vii)
This is in reply to your memorandum of May 9 asking for our comments with respect to the legitimacy of a claim for exemption from tax on interest payments made by XXXX.
The relevant loan was made in the fall of XXXX and under the terms of repayment, no part of the principal is required to be paid within 5 years and one month from the date of the loan. Your concern, however, is with the following term of the loan agreement:
XXXX
With respect to the requirement in subparagraph 212(1)(b)(vii) of the Act that the borrower may not, under any circumstances, be obliged to repay more than 25% of the loan within 5 years, it is the opinion of Mr. Claudio Riti of your office that this requirement is not met because of the above-quoted term contained in the loan agreement.
Our Comments
We disagree with Mr. Riti's opinion. It is the general position of the Department in this regard that if a borrower must first take some voluntary action before he is obliged to make a repayment of principal, that repayment should not be taken into consideration in determining whether or not the aforesaid "25% within 5 years" requirement is met. The "Main Levee" term of the agreement simply gives the borrower the right to obtain a release of hypothecated property by making a stipulated payment. The borrower is not, however, obliged to obtain such a release. Thus, any payment made pursuant to the "Main Levee" term of the agreement is effectively a voluntary payment, not an obligatory one.
In conclusion, based on a reading of the loan agreement, it is our view that the subject interest paid by XXXX is exempt from Part XIII tax pursuant to the provisions of subparagraph 212(1)(b)(vii) of the Act.
for Director Non-Corporate Rulings Division
212(1)(b)(vii)
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