1 May 1988 Income Tax Severed Letter

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.

HEAD OFFICE Rulings Directorate Resource Industries Section J.T. Gauvreau (613)957-4363

Deductibility of Interest on APIP Overpayments

FILE: Nu-West Group Limited, successor to Voyageur Petroleums Ltd.

We are writing in reply to your memorandum of April 13, 1988, wherein you requested confirmation of our policy concerning the issue of the deductibility for income tax purposes of interest expense incurred in connection with an-overpayment of incentives under the Alberta Petroleum Incentive Program ("APIP") in circumstances described by you as follows:

Facts

XXXX

As you have pointed out, we have considered this issue before in the context of a repayment of incentives pursuant to the Petroleum Incentives Program Act (the "PIP Act") and Regulations promulgated thereunder.

Our position is that any interest charged in respect of any repayment of an incentive pursuant to the PIP Act cannot be characterized as being payable on "borrowed money" and, therefore, is not deductible under paragraph 20(1)(c) of the Act.

In regards to the application of that position to the repayment of an incentive pursuant to the APIP Act, section 16, thereof, states:

"l6. If an incentive is made to a person and for any reason the person is not entitled to the incentive or the amount of the incentive exceeds the amount to which the person is entitled, or it an incentive is made in circumstances in which a terns or condition has been imposed under this Act or the regulations and the term or condition has not been met or has been contravened, the amount of the incentive or excess, as the case may be, together with interest at the prescribed rate, is a debt to Her Majesty in right of Alberta.".

With respect to interest referred to in section 16, the calculation of such interest is governed by section 51 of the APIP Regulations.

If one compares the above provision to section 24 of the PIP Act (which is the charging provision for interest on PIP overpayments), on finds that there is no difference in the manner in which one interprets these different provisions. Consequently, our position on the non- deductibility of interest charged on PIP overpayments is extended to APIP overpayments.

We reviewed XXXX submissions on the issue and, in particular, whether interest charged in respect of any repayment of APIP incentive would constitute "borrowed money" for purposes of subparagraph 20(1)(c) of the Act.

In this regard, XXXX submitted, in part, the following:

"The "McCool" 49 DTC 700 (S.C.C.) case, to which you referred in your letter, is based on old law and related to interest on unpaid purchase price. These amounts are now allowed as a deduction. As such "McCool" should have no application to the case at hand.".

In view of comments made by Estey, J. in the aforesaid jurisprudence, we are not able to accept this submission. At pages 708-709 of said jurisprudence, Estey J. said:

"Terms such as "borrowed capital", "borrowed money" in tax legislation have been interpreted to mean capital or money borrowed with a relationship of lender and borrower between parties. Inland Revenue Commissioners v. Port of London Authority, [1923] A.C. 507; Inland Revenue Commissioners v. Rowntree & Co. Ltd., [1945] 1 All E.R. 482; Dupuis Frères Ltd. v. Minister of Customs and Excise, [1927] Ex. C.R. 207. It is necessary in determining whether that relationship exists to ascertain the true nature and character of the transaction.".

In our view, it is difficult, if not impossible, to conclude that the relationship between the Crown and XXXX is at any time that of lender-borrower, any more than in a situation where a taxpayer owes the Department taxes plus interest (the interest owing by the taxpayer is not in respect of a lender - borrower relationship). XXXX is merely an applicant for incentives payable by the Crown pursuant to the APIP Act; if it turns out that XXXX is ultimately proven not to be entitled to the funds pursuant to the terms of the statutory scheme (as is the case here), it must repay those funds with interest.

It is our view that any interest exigible under the circumstances described by you would not be on "borrowed money" within the meaning of subparagraph 20(1)(c)(i) of the Act.

If you have any questions or comments, please do not hesitate to contact Jim Gauvreau at (613)957-4363.

Yours truly,

ORIGINAL SIGNED BY C. SAVAGE Chief Resource Industries Section Bilingual Services and Resource Industries Division Rulings Directorate