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: whether amounts paid in respect of the year are included in 18(9.2)(a)(ii)
Position: No
Reasons: Words in parentheses
October 12, 2004
TORONTO CENTRE TSO HEADQUARTERS
Denise Dalphy, LL.B.
Attention: Albert Leung Financial Industries Division
(613) 941-1722
2004-008291
Calculation of Interest on Debt Obligations
This is in reply to your e-mail of June 24, 2004 and your earlier telephone conversation (Leung/Diguer) wherein you asked for our comments on the technical analysis contained in correspondence that you received.
In particular, the situation that you have asked us to consider is the application of subparagraph 18(9.2)(a)(ii) of the Income Tax Act (the "Act") where interest is paid semi-annually, in arrears, on April 4 and October 4 in each year at a rate of 12.85%. By "in arrears", it is meant that the interest due on any interest payment date is interest that accrued during the prior six-month period. The issue is whether payments that are made in the current year are included in the ambit of subparagraph 18(9.2)(a)(ii) of the Act.
Subsection 18(9.2) of the Act requires that the interest that is payable in respect of a taxation year must be determined on the basis that, inter alia, the amount outstanding at each particular time in the year ... on account of the principal amount of the debt obligation is the lesser of the amounts determined by paragraphs 18(9.2)(a) and (b) of the Act.
Paragraph 18(9.2)(a) of the Act provides that ..."the amount outstanding at each particular time in the year that is after 1991 on account of the principal amount of the debt obligation..." is the amount by which subparagraph (i) (the principal amount outstanding) exceeds the total of (ii) and (iii).
Subparagraph (ii) reduces the principal amount in subparagraph (i) by:
(ii) all amounts each of which is an amount paid before the particular time in satisfaction, in whole or in part, of the obligation to pay interest on the debt obligation in respect of a period or part thereof that is after 1991, after the beginning of the year, and after the time the amount was so paid (other than a period or part thereof that is in the year where no such amount was paid before the particular time in respect of a period, or part of a period, that is after the end of the year), and
For an amount to come within the ambit of subparagraph (ii):
1. The amount must have been paid before the particular time
2. The amount must have been paid in satisfaction of an obligation to pay interest on the debt obligation.
3. The obligation to pay interest must be in respect of a period of time that is
(a) after 1991
(b) after the beginning of the [taxation] year (in respect of which you are determining if interest is deductible) AND
(c) after the time the amount was paid.
4. If an amount qualified under the above, it is still not included in subparagraph 18(9.2)(a)(ii) if the payment relates to an obligation to pay interest in respect of a period "that is in the year where no such amount was paid before the particular time in respect of a period, or part of a period, that is after the end of the year"
Based on the requirements of subparagraph 18(9.2)(a)(ii) of the Act that I have described in paragraphs 3(c) and 4 above, in order for an amount to be included in subparagraph 18(9.2)(a)(ii) of the Act, the amount that was paid must have been paid in satisfaction of an obligation to pay interest in respect of a period that is after the date of the payment and that is after the end of the year. As such, in the fact pattern above, (where interest is paid in arrears) no amount would be included in subparagraph 18(9.2)(a)(ii) of the Act with respect to payments made in a particular year that do not relate to an obligation to pay interest after the end of that year. If, however, the full amount of the interest paid was not paid in arrears, but a portion related to a period that was after the end of the year, the portion of the interest that was paid in respect of a future taxation year would be included in subparagraph18(9.2)(a)(ii) of the Act.
With respect to the technical interpretation provided by Technical Applications and Valuations Division on November 15, 2002 (the "Technical Applications opinion"), it is our understanding that the issue that they were addressing was not interest paid in arrears, but prepayments of interest (that is interest payments that related to a year subsequent to the payment). So, if for example, an $8,000 interest payment was made in 1995, but $6,000 related to 1995 and $2,000 related to 1996, only $2,000 would be included in subparagraph 18(9.2)(a)(ii) of the Act for 1995.
Finally, while we agree with the taxpayer that our interpretation is consistent with the information contained in the Department of Finance's Explanatory Notes to subsection 18(9.2) of the Act, we agree with the Technical Applications' opinion that the calculation may be made at any time in the taxation year in respect of which the interest deduction is sought.
We hope this opinion will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency'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 your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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