21 August 1991 Ruling 912081 F - Promissory Notes and Reserves

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.

912081

Dear Sirs:          19(1)

This is in reply to your letter of July 29, 1991 requesting an advance income tax ruling on behalf of the above individuals and further to our telephone conversation of August 9, 1991 with respect to your ruling request.

As discussed with you (Thornley  19(1)  August 9, 1991, we are unable to rule where a matter on which a determination is requested is primarily one of fact.  Whether the re-negotiated note would be considered to be accepted as "conditional payment" rather than as "absolute payment" is such a matter.  We are, however, prepared to provide our general comments.

Our Comments

Generally a change from an interest-bearing to interest-free note would precipitate a disposition (see paragraph 7, Interpretation Bulletin IT-448).  However, where a promissory note comes due or is considered disposed of during the year and then is re-negotiated before the end of that year, even with changes to the original terms of that note, we are of the view that the renegotiated note may be considered a continuation of the original note where it is accepted only as conditional payment of the unpaid balance of the original note such that the holder of the note retains his legal recourse with respect to the original note and the original proceeds of disposition.  This position is set out in paragraphs 9, 10 and 11 of former IT-436 which, although not carried forward into IT-436R because of the introduction of the 5 year time limits on reserves, is still considered relevant in some situations.  That position in essence is that there are situations where a vendor who has taken back a promissory note may, in conjunction with the person who acquired the property, agree to extend the original due date of the note. The extension of the note could occur before the original due date and before the end of the vendor's taxation year for which the reserve is being considered.  In those and similar situations the Department's practise is to permit a vendor to continue claiming a reserve if a promissory note, originally taken back on a disposition is extended within the time limits indicated and the renewed note (as conditional payment) is accepted as a continuing evidence of the original debt.

The Department's position with respect to the acceptance of promissory notes and reserves under subparagraph 40(1)(a)(iii) is contained in IT-436R.  Paragraph 3 of the Bulletin states, with regard to "conditional payment", that "Normally the Department will assume that the promissory note is received as conditional payment unless the sales agreement clearly indicates that the note has been accepted as absolute payment."  Thus, it would appear, unless there is evidence to the contrary, that the re-negotiated note in your fact situation may be considered to be accepted as conditional payment and not as absolute payment.

We trust our comments will be of assistance in this matter. However, they are an expression of opinion only and, as such, are not binding on the Department.  A refund of your $400.00 deposit will be returned to you under separate cover.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch