7 January 1991 Income Tax Severed Letter - Interest Expense Claimed by Investors

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 Interest Expense Claimed by Investors

We are writing in response to your memorandum of April 17, 1990 in which you requested our views concerning the above-noted subject matter. We regret that other workload prevented an earlier response to your memorandum.

The facts as we understand them are as follows:

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ISSUE

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OUR OPINION

We believe it would generally be very difficult to conclude that interest paid or payable on a limited or non-recourse loan would not be interest paid or payable pursuant to a legal obligation on the basis that the security for the loan might not be sufficient to cover the principal and interest payable on the due date. (This may not be the case, however, if it were apparent at the time the loan were made, that there was no reasonable expectation the principal and interest could be paid as XXX

The wording in paragraph 20(1)(c), as relevant to the case at hand, is:

. . . an amount paid in the year or payable in respect of the year . . . pursuant to a legal obligation to pay interest on . . . (ii) an amount payable for property acquired for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business . . .

An amount is considered to be payable if there is an absolute and unconditional legal obligation to pay the amount even though payment may not be due until a later date. See, for example, J.L. Guay Ltee v. MNR, 71 DTC 5423 (FCTD), aff'd [[1973] C.T.C. 506] 73 DTC 5373 (FCA), aff'd [[1975] C.T.C. 97] 75 DTC 5094 (SCC) and The Queen v. Ken & Ray's Collins Bay Supermarket Ltd. [[1975] C.T.C. 504] 75 DTC 5346 (FCTD).

The phrase “in respect of the year” was considered in MNR v. Midwest Abrasive Co. of Canada Ltd. [[1973] C.T.C. 548] 73 DTC 5429 (FCTD) and Fernwood Construction of Canada Ltd. v. MNR, [[1985] 1 C.T.C. 2289] 85 DTC 257 (TCC). In both those cases, interest was payable “if and when” some event occurred. In Midwest interest was payable if and when it was requested by Midwest's parent company and in Fernwood interest equal to 25% of the profits of Fernwood would be paid if and when such profits were realized. The taxpayers, in both instances, were attempting to deduct interest in one year that related to prior years and in both cases the court disallowed that portion of the interest paid in the year that was payable in respect of prior years. XXX

• (a) XXX CCA is considered to be relevant in determining whether an activity has a reasonable expectation of profit, according to the response given to question 35 of the 1987 Revenue Canada Round Table; and
• (b) in accordance with subsection 9(3), income from property does not include any capital gain from the disposition of that property XXX