7 July 1990 Income Tax Severed Letter - Tax treatment of “interest” by vendor and purchaser on sale of shares

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.

Subject: XXX Treatment of "Interest" by Vendor and Purchaser on Sale of Shares

Further to our memorandum of December 23, 1988 (#7-3077) (the "Previous Memo") we are writing in reply to your memorandum of August 21, 1989, wherein you requested we review a submission received XXX

Paragraph 12 of Interpretation Bulletin IT-396R states:

"Where an enforceable agreement for the sale of property is executed but the negotiated price is not paid until a subsequent date, any interest that is received by the vendor from the date of the agreement to the date of payment is interest income in the vendor's hands."

For the above statement to apply there must be both an enforceable agreement for the sale of property and the amount must meet the definition of interest. As indicated in our Previous Memo, the courts have established that an amount will not be interest unless it:

• a) is calculated on a day-to-day basis (see The Attorney General For Ontario v. Barfield Enterprises Ltd. (1963) SCR 570, at 575),
• b) is calculated in reference to a principal sum or a right to a principal sum (see Reference as to the Validity of Section 6 of the Farm Security Act, 1944, of the Province of Saskatchewan, (1947) SCR 394, at 412), and
• c) is compensation paid for the use of the principal sum or the right to use the principal sum (see Reference Farm Security, supra, at 411).

The situations at hand are similar to those considered in Southport Corporation v. Lancashire County Council, (1937) 2 K.B. 589 and Huston, Whitehead and Whitehead v. MNR, [[1961] C.T.C. 414] 61 DTC 1233 (Ex. Ct.) in that it can be argued that there is no principal sum or a right to a principal sum on which interest could be calculated prior to the Closing Date. XXX

In our opinion there is a respectable argument that the situations at hand are distinguishable from Perini and Miller. Perini may be distinguished on the basis that the "interest" was added in respect of additional compensation which might or might not be payable for the period following the closing of the purchase and sale transaction. In Miller, similarly, the employee had already performed the services. The employee was entitled to additional compensation pursuant to the new collective agreement in respect of the period during which the services had been performed. The relevant documentation enabled the court to conclude that "interest" paid in respect of such additional compensation indeed had the quality of interest. In both Perini and Miller there was delay in payment. XXX

There appears to be some uncertainty with respect to the meaning of the term "enforceable agreement" as used in paragraph 12 of IT-396R. That uncertainty is clarified by the accompanying example where interest is calculated from the date of closing (ie., the date the disposition took place and the money owed to the vendor) to the date of payment. The effect of conditions precedent on the date of disposition was discussed in our Previous Memo. We note that the true-conditions-precedent doctrine derived from Turney v. Zhilka, (1959) SCR 578, is not always consistently interpreted by the Canadian courts. However, this doctrine has never been explicitly overturned or qualified. G.H.L. Fridman summarized the problems associated with this doctrine on page 424 and 425 of The Law of Contract in Canada (1986). XXX