27 April 1998 External T.I. 9802635 - INTEREST ON PREPAID TAXES

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 interest paid on property taxes overpayments taxable?

Position: YES

Reasons: meets the definition of interest

XXXXXXXXXX 			                                                            				980263
C. Tremblay
Attention: 	XXXXXXXXXX 

April 27, 1998

Dear Sirs:

Re: Interest on Prepaid Property Taxes

This is in reply to your letter of January 29, 1998, and further to a telephone conversation (XXXXXXXXXX/Tremblay) of February 25, 1998, wherein you request we confirm that paragraph 14 of Interpretation Bulletin IT 396R is being correctly applied by the city and that interest paid to taxpayers on credit property tax account balances is not taxable. You also seek our position on the tax status of interest paid in the following situations:

1. Overpayments, resulting from a difference between estimated and actual annual property taxes.

2. Overpayments, resulting from a reduction in the assessment value of property.

3. Overpayments, resulting from a customer intentionally making extra payments to their property tax account.

We can only confirm the tax implication of a particular fact situation by way of advance income tax ruling, and, as discussed, if an advance income tax ruling is required, please refer to Information Circular 70-6R3 for the procedure to be followed. We have, however, set out some general comments which may be of some assistance.

We confirm that our position as stated in paragraph 14 of Interpretation Bulletin IT-396R still applies. Where an amount is computed by the application of a rate of interest to payments made in advance of the due date such as property taxes levied by municipalities, the reduction is not considered interest, but rather a reduction of the amount otherwise payable. This position, however, does not apply to the overpayment.

In our view, a portion of an overpayment made by the city to a taxpayer meets the definition of "interest" as adopted by the Federal Court Trial Division in Miller vs The Queen ( 85 DTC 5354) and is required to be included in income of the recipient pursuant to paragraph 12(1)(c) of the Act; in our view, this is so, regardless of whether the overpayment results from a difference between the estimated and the actual amount of annual property taxes, from a reduction in the assessed value of the property, or from a customer intentionally making extra payments to his property tax account..

Furthermore, clause 201(1)(b)(ii)(C) of the Income Tax Regulations requires the person who makes a payment on account of interest to file a prescribed information return (T-5's). A T-5 supplementary slip, however, is not required for interest paid to a recipient whose total amount for the year is less than $50.

We caution that our replies are not advance income tax rulings but are merely opinions based solely on the information given. These opinions might very well change upon a review of all the facts.

We trust these comments will be of assistance

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