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: What is the tax treatment of interest on an investment contract that accrued but was not payable while the individual was a non-resident, and the individual immigrates to Canada before the maturity of the investment?
Position: The interest that accrues to the anniversary day of the investment contract or any interest received or that became receivable when the taxpayer is a resident would be included in income by virtue of subsection 12(4) or paragraph 12(1)(c) of the Act.
Reasons: Subsection 12(4) of the Act requires a taxpayer, holding an interest in an investment contract on any anniversary day of the contract, to include in income for the year the interest that accrued to the end of that day to the extent that it has not already been included in computing the taxpayer's income for the year or any preceding year.
September 30, 2011
Business Returns Directorate V. Srikanth
750 Heron Road Income Tax Rulings Directorate
Ottawa ON K1A 0L5 Legislative Policy and
Regulatory Affairs Branch
2011-040287
Attention: Mukaddes Koç
Tax treatment of interest accrued on an investment contract prior to immigration
This is in response to your correspondence dated April 12, 2011 wherein you requested our views on the tax implications of accrued interest on an investment contract held by a non-resident, immediately after the non-resident immigrated to Canada.
Specifically, you have described a scenario wherein an investment contract, as defined in subsection 12(11) of the Income Tax Act (the "Act"), was issued to a non-resident (the "Taxpayer") with a 10-year term. While interest accrued on the investment contract, no amount was paid during the time that the Taxpayer was a non-resident. The Taxpayer immigrates to Canada prior to the maturity of the investment contract. You would like our views on whether the Taxpayer has to report the interest that accrued until the date of immigration, on the first anniversary date of the investment contract immediately after immigration, pursuant to subsection 12(4) of the Act, and whether such amount is to be included in the T5 slip to be issued by the issuer of the investment contract for reporting purposes.
Subsection 12(4) of the Act requires a taxpayer, holding an interest in an investment contract on any anniversary day of the contract, to include in income for the year the interest that accrued to the end of that day to the extent that it has not already been included in computing the taxpayer's income for the year or any preceding year. An investment contract means, pursuant to subsection 12(11) of the Act, any debt obligation other than those specifically excluded. The term "debt obligation" is considered to include, for example, bank accounts, term deposits, guaranteed investment certificates, Canada Savings Bonds, mortgages, corporate bonds and loans. Our comments hereunder are based on the assumption that the investment contract in question is not one that is specifically excluded.
As discussed in the 'Summary' in Interpretation Bulletin IT - 420R3, entitled 'Non-Residents - Income earned in Canada', "A non-resident of Canada is subject to tax under section 115 in Part I of the Act on taxable income earned in Canada. The income to be reported for this purpose includes income from an office or employment in Canada (including director's fees and employment benefits), income from carrying on a business in Canada, taxable capital gains from the disposition of taxable Canadian property, and certain other Canadian source income."
It may be noted that section 115 does not operate to include amounts accrued under section 12 in income while an individual is not a resident. However, investment income paid by a Canadian source and received by a non-resident would normally be subject to withholding tax of 25% under Part XIII of the Act unless reduced by tax conventions. At the same time, with respect to an obligation issued by a Canadian resident, where interest has accrued and is payable to a non-resident of Canada, but has not been paid or credited to the non-resident, Part XIII does not apply because there is no provision in the Act which would deem the accrued interest to have been paid or credited at the time of immigration so as to impose Part XIII tax on the accrued income at that time.
Subsection 128.1(1) of the Act provides rules that apply when a taxpayer immigrates to Canada. Paragraph 128.1(1)(b) treats the taxpayer as having disposed of each property owned by the taxpayer, immediately before that time, other than certain specified properties, for proceeds equal to the property's fair market value. However, pursuant to paragraph 128.1(4)(b), which describes the tax consequences on emigration, the taxpayer is deemed to have disposed of the property 'for proceeds equal to its fair market value at the time of disposition, which proceeds are deemed to have become receivable and to have been received by the taxpayer at the time of disposition'. Thus, in Holzhey v The Queen, 2007 TCC 247, upon emigration, when the appellant reported the proceeds from the deemed disposition as a capital gain, on reassessment the amount was included in appellant's income pursuant to paragraph 12(1)(c) of the Act as an amount received in lieu of interest. In dismissing the appeal, Paris J. Made the following comments:
"I disagree with the Appellant's argument that the scheme of the Act regarding accrued interest would support a narrow interpretation of that phrase. I do not believe that the manner in which the Act treats accrued interest that has not been received or become receivable is relevant to the issue in this appeal. The Minister in this case is not attempting to tax accrued interest. The amount sought to be included in income is the proceeds from the deemed disposition of property. The deemed receipt of the proceeds triggers the inclusion in income. As with any amount received by a taxpayer, the nature of the receipt determines whether it is required to be included in income or not. In this case, the payment was received "in lieu of interest" and is required to be added to the Appellant's income."
Even though we do not see a similar 'received' or 'receivable' implication in paragraph 128.1(1)(b) of the Act for the purpose of deemed disposition on immigration, in our view, the accrued interest on the investment contract does not lose its character immediately after immigration. Accordingly, it becomes taxable pursuant to subsection 12(4) on the first anniversary date immediately after immigration. Hence, the issuer of the investing contract should include the pre-immigration accrued interest in the T5 slip issued on the first anniversary date immediately after immigration and the Taxpayer should report such amount on his/her tax return in the taxation year that includes that date.
We recognize that our interpretation could give rise to double taxation in some situations and it is not clear whether relief would be available under the Act or treaties. As we have not had the opportunity to consider the issue of double taxation in this context before, and as each case has its own set of facts, you may wish to submit any situation involving double taxation to the International Section of Income Tax Rulings for their consideration.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
R.A. Albert, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011