7 October 1991 Income Tax Severed Letter - Deferred Loan Payments Comprising Principal and Interest

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.

XXX

Re: XXX

We are writing in response to your letter of October 31, 1990, addressed to Mr. R. D'Aurelio requesting a further technical interpretation of the application of the Income Tax Act (the "Act") in respect of deferred loan payments comprising principal and interest. We regret that other workload has prevented an earlier response to your letter.

We note from the documents you sent to us that the specific transactions referred to in your letter are completed transactions. As noted in paragraph 21 of our Information Circular on Advance Income Tax Rulings, IC 70-6R2 [Information Circular 70-6R2], our district offices provide opinions on completed transactions. Therefore, you may wish to discuss the appropriate reporting of the completed transactions with our Edmonton District Office. We suggest you contact Mr. E. J. Schermann, the Chief of Audit, at (403) 495-3568, who is aware of this correspondence.

Although we are unable to comment specifically on the completed transactions, we can advise you of our general view that, as mentioned in our previous letter, if all other requirements of paragraph 20(1)(c) are met, a taxpayer engaged in a farming business who has not elected under subsection 28(1) of the Act to compute his business income in accordance with the "cash method", may deduct interest which is payable in respect of the year. An amount is considered to be payable if there is an absolute and unconditional legal obligation to pay the amount event though payment may not be due until a later date.

As also mentioned in our previous letter, if all other requirements of paragraph 20(1)(c) are met, a taxpayer engaged in a farming business who has elected under subsection 28(1) of the Act to compute his business income in accordance with the "cash method" may only deduct interest in the year it is paid. An overpayment of interest by a borrower which is to be refunded is not considered, for purposes of paragraph 20(1)(c), to be paid in the year and would therefore not be deductible. It is our view that an amount paid on condition that it will be repaid is not a bona fide payment.

All taxpayers engaged in a farming business, whether or not they have elected under subsection 28(1) of the Act to compute their income in accordance with the "cash method", are required to include an amount received from a government, municipality or other public authority in their income, pursuant to subparagraph 12(1)(x), if the payment could reasonably be considered to have been received as

• a) an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement, or
• b) a reimbursement, contribution, allowance or assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of any outlay or expense to the extent the amount has not been included in computing the taxpayer's income for the year or a preceding taxation year.

Whether an amount can be reasonably considered to have been received as an inducement or as a reimbursement, contribution, allowance or assistance is a question of fact. Generally, a refund of an overpayment by a borrower of interest and principal would not be included in income pursuant to paragraph 12(1)(x). Also amounts received from a government or other public authority which are unconditionally repayable would not be included in income pursuant to paragraph 12(1)(x).

Although we cannot comment on your GAAR question in respect of completed transactions involving particular taxpayers, it is noted that subsection 245(3) excludes from the definition of an avoidance transaction a transaction which may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit.