Payment & Receipt


Canada v. Innovative Installation Inc., 2010 DTC 5175 [at 7317], 2010 FCA 285

indirect receipt through debt repayment

In order to ensure payment of a loan owing by the taxpayer ("Innovative") to a bank (RBC) on the death of Innovative's principal (Mr Peacock), Innovative purchased key man insurance from Sun Life with RBC as the policyholder and funded the payment of premiums on the policy. When Mr Peacock died, Sun Life paid the insurance proceeds to RBC, which was contractually obliged to apply them to discharge the loan.

Evans JA found (at para. 6) that, for the purposes of determining Innovative's capital dividend account, "Innovative 'received' 'proceeds of a life insurance policy' when RBC applied them, as the contract required, to discharge Innovative's debt," and stated (at para. 9):

Paragraph 89(1)(d) does not require that a corporation receive the proceeds directly from the insurer or that it be named as the beneficiary of the policy. It only had to have "received" them in consequence of Mr Peacock's death.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account receipt of insurance proceeds through debt repayment 156

Wannan v. Canada, 2003 DTC 5715, 2003 FCA 423

application of payment by creditor

The quantum of the taxpayer's liability under s. 160 turned upon whether a bankruptcy dividend received by the Crown from the trustee in bankruptcy for her husband should be considered to reduce the tax liability of her husband at the time he made contributions to her RRSP rather than being applied to more recent tax liabilities. The taxpayer argued that Clayton's case should be applied to deem the dividend to be applied to the oldest debt. Sharlow J.A., however, was not satisfied that the Crown was precluded from applying the bankruptcy dividend, as it did, to the newest of the tax liabilities of the taxpayer's husband.

Banner Pharmacaps NRO Ltd. v. Canada, 2003 FCA 367, 2003 DTC 5642 (FCA)

promissory note accepted as payment

The wholly-owned Canadian subsidiary of the taxpayer declared a dividend, with the resolution stipulating that the dividend was "to be payable by the Corporation by the issuance of a demand promissory note". Sharlow J.A., before finding that the dividend was paid by means of delivery of the promissory note given that this was the expressed intention in the resolution, stated (at para. 7):

"The legal effect of delivery of a promissory note depends upon all the relevant facts, the most important fact being the intention of the maker of the note as determined by the evidence. For example, in some circumstances a promissory note may be evidence of a debt to be paid at some future time. In other circumstances, delivery of a promissory note may itself be payment of a particular obligation."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(j) dividends recognized on cash basis 117
Tax Topics - Income Tax Act - Section 133 - Subsection 133(8) - Non-Resident-Owned Investment Corporation dividend received when note issued/such note not a money-lenidng business 227

Canada v. Gillette Canada Inc., 2003 DTC 5078, 2003 FCA 22

replacement with different currency note

The replacement of a French-franc note by a Canadian-dollar note with an equivalent principal amount did not give rise to a payment or crediting for purposes of s. 212(13.1)(b) given that the Canadian-dollar note was issued and accepted as replacement for the French-franc note in circumstances where the terms remained the same except for the currency of payment.

Hickman Motors Ltd. v. Canada, 97 DTC 5363, [1997] 2 S.C.R. 336, [1998] 1 CTC 213

unrecorded revenues

In connection with finding that the taxpayer had generated revenues, which were not reflected in its financial statements, from holding leasing assets for five days, L'Heureux-Dubé J. stated (at para. 87):

The law is well established that accounting documents or accounting entries serve only to reflect transactions and that it is the reality of the facts that determines the true nature and substance of transactions: Vander Nurseries Inc. v. The Queen, 95 D.T.C. 91 (T.C.C.); Mountwest Steel Ltd. v. The Queen (1994), 2 G.T.C. 1087 (T.C.C.); Uphill Holdings Ltd. v. M.N.R., 93 D.T.C. 148 (T.C.C.); M.N.R. v. Wardean Drilling Ltd., 69 D.T.C. 5194 (Ex. Ct.); M.N.R. v. Société Coopérative Agricole de la Vallée d'Yamaska, 57 D.T.C. 1078 (Ex. Ct.).

Piché v. MNR, 93 DTC 5295 (FCA)

payment when cheque accepted as payment

Interest owing to the taxpayer as a result of the acceptance by his co-shareholders of his offer to sell his shares in a corporation, was found to be received by him at the end of 1990, when he accepted the related cheque as payment (as evidenced by his deposit of the cheque at a branch of his bank that, unlike his local branch, was open that day), rather than early in 1991 when the amount was credited by the bank to his account at the local branch.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) interest received upon the receipt of cheque 100

Coppley Noyes & Randall Ltd. v. The Queen, 91 DTC 5291 (FCTD), varied on appeal 93 DTC 5196, 5508 (FCA).

presumed application to oldest debt

The taxpayer's practice, in determining its allowance for doubtful accounts at the end of its taxation year on November 27, 1082, included having regard to payments made by trade debtors during the three months after that its year end, but treating receipts as going to the oldest receivables first. Reed J stated (at p. 5294):

When neither the debtor nor creditor designates that a payment is to be applied to a specific invoice, it is assumed that the payment is being made to pay off the earliest debt: [citing inter alia Dunlop, Creditor-Debtor Law in Canada.]

Minsham Properties Ltd. v. Price, [1990] BTC 528 (Ch. D.)

mere addition of accrued interest not payment

Although "there can be no doubt that a book entry can constitute payment" (p. 540), in the case of an informal loan from the taxpayer's parent corporation to the taxpayer, the mere addition of accrued interest to the principal owing by the taxpayer to the parent did not constitute payment.

Cumberland Properties Ltd. v. The Queen, 89 DTC 5333, [1989] 2 CTC 75 (FCA)

receipt by unauthorized agent not payment

On November 24, 1980 the Department of Supply and Services issued a refund cheque to "Cumberland Properties Ltd. c/o John Church", which was the manner in which Cumberland's 1978 return had been completed. This was not sufficient to clothe Church with ostensible authority to negotiate the cheque (as opposed to certifying the return). In addition, any authority of Church was revoked when Cumberland's 1979 return (showing a different address and making no mention of John Church) was received by Revenue Canada on September 2, 1980, and by a letter of Cumberland enquiring as to the refund cheque which Revenue Canada received on March 3, 1981, which was before the negotiation of the cheque by Church on July 24, 1981. [C.R: Agency]

C. & E. Commissioners v. Faith Construction Ltd., [1989] BTC 5121 (C.A.)

receipt even though obligation to lend back

In response to the proposed repeal effective 1 June 1984 of the zero rating of building alteration services, four building companies with existing contracts for building alterations arranged with their customers for payment by the customers before that date subject (in one case) to the condition that the building company would immediately lend back an equivalent sum, to be repaid as the work was done or subject (in the other case) to that money being paid into an account of the building company for release only as the work was done.

Although the use of the money was fettered, the payments discharged the liability of the customers under the building contracts. Accordingly, the building companies had "receive[d] a payment" before 1 June 1984.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 341 - Subsection 341(1) 124

Parkside Leasing Ltd. v. Smith, [1985] BTC 25 (HC)

receipt only when cheque deposited

Interest paid by cheque was not received on the date that the cheque was received. Instead, the interest was not received until either the date that the recipient deposited the cheque, or the date that the cheque cleared.

Narich Pty. Ltd. v. Commissioner of Pay-roll Tax, [1984] BTC 8019 (PC)

indirect receipt of wages

An argument was rejected to the effect that fees received by employees of a company were not wages because they were collected directly from clients of the company.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 76

Western Union Insurance Co. v. The Queen, 83 DTC 5388, [1983] CTC 363 (FCTD)

sending of cheque to sender's lawyers

The sending of a cheque by the lender to (its) solicitors did not constitute the payment of a sum to the borrower.

The Queen v. Ans, 83 DTC 5038, [1983] CTC 8 (FCTD)

receipt by set-off

A company's shareholder was held to have received a bonus when the amount of the bonus payable by the company was credited against the balance outstanding on the loan by the company to the shareholder.

Mendels v. The Queen, 78 DTC 6267, [1978] CTC 404 (FCTD)

payment by mutual book entry

The taxpayer was partner with another dentist in the partnership for their professional practice and tey also jointly owned a corporation (the "Company"), which initially only leased laboratory and dental equipment to the partnership. For the 1970 taxation year, they decided that the partnership also should pay a management fee of $20,000 to the Company. The taxpayer's pro rata portion of the fee was denied as an artificial deduction from income on the ground that there was no change in practices following the new fee arrangement, and thus no evidence that the supposed services of the Company were not being performed by the two individuals in their capacities of partners of the partnership rather than as officers of the Company. Before so concluding, Cattanach J stated (at p. 6270):

[The Crown contended] that there was no actual payment by cheque or cash from the partnership to the Company. That is so but the exchange was effected by journal entries. There was a credit entry in the records of the Company indicating a credit of $20,000 and I take it that there was a corresponding debit entry in the records of the partnership.

There is no need, in my opinion, to go through the formality of handing actual money or a cheque over. The transaction is necessarily bilateral and in my view those journal entries constitute actual, nor merely notional or constructive payment. The evidence or material embodiment of the transaction may consist of book entries made in pursuance of the arrangement but what has happened is, if so intended, equivalent to the receipt of money (see Lord Wright in Trinidad Lake Asphalt…[1945] AC 1 at 10… .)

The Queen v. Canadian-American Loan and Investment Corp. Ltd., 74 DTC 6104, [1974] CTC 101 (FCTD)

receipt of sums collected by affiliate

The taxpayer, which operated a boat storage business in a storage building, subleased a portion of the leased premises to an affiliate ("Georgia") with accumulated losses, but continued to operate the business the same as before. However, the customer receipts were booked as revenues of Georgia, and the stipulated sublease rents were booked as revenues of the taxpayer. Cattanach J stated (at para. 6108):

All that Georgia did was to pay the monthly rental of $500 to the defendant and to receive in each month the amounts paid to the defendant by the customers which in the nine months in the defendant's taxation year totalled $14,028.60.

...The mere fact that there was no handing of money back and forth and the embodiment of the transactions consisted of book entries is still the equivalent of the payment and receipt of money. (See...Trinidad Lake Asphalt...[1945] A.C. 1)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) 83

Blauer v. MNR, 71 DTC 5113, [1971] CTC 154 (F.C.T.A.), briefly aff'd 75 DTC 5076, [1975] CTC 112 (SCC)

post-dated cheque

A post-dated cheque was payable for purposes of ss. 12(1)(l) and 76(1) on its date rather than the date of delivery.

Hall v. MNR, 70 DTC 6333, [1970] CTC 510 (Ex Ct), briefly aff'd 71 DTC 5217 (SCC)

interest coupons required to be presented

An individual following the cash method for the recognition of interest income received interest represented by interest coupons on the due dates. "On the due date ... the obligation to pay vested subject only to the 'presentation and surrender of the ... interest coupons'. Hence the presentation and surrender of the coupons was a condition precedent to the obligation to pay ... but the appellant having the coupons could readily present and surrender them and thereby satisfy the condition precedent."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) sale of matured interest coupons gave rise to interest receipt or amount in lieu 204

Robwaral Ltd. v. MNR, 60 DTC 1025, [1960] CTC 16 (Ex Ct), briefly aff'd 64 DTC 5266 (SCC)

dividend not received until cheque received

A dividend was "received" by a shareholder in the year in which the cheque was drawn and received by him, rather than in the previous year in which the dividend was declared and in which the record date occurred.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(1) 67

Moody v. MNR, 57 DTC 1050 (Ex Ct)

cheque generally payment when received

In finding that cheques that a cash-basis farmer had on hand at the beginning of the year were income in the previous year when they had been received, rather than in the current year, Thurlow J stated (at p. 1054):

In the absence of some special circumstance indicating a contrary conclusion such as, for example , post-dating or an arrangement that the cheque is not to be used for a specified time, a payment made by cheque, although conditional in some respects, is nevertheless presumably made when the cheque is delivered and, in the absence of such special circumstances, there is, in my opinion, np ground for treating such a payment other than as a payment of cash made at the time the cheque was received by the payee.

Flinn v. MNR, 3 DTC 1157, [1948] Ex. C.R. 272 (Ex Ct)

note issued evidencing payment obligation

Dividends on preference shares of a corporation, including those held by the taxpayer, were substantially in arrears. The corporation declared a dividend in the amount of the aggregate arrears on such shares, but postponed payment of the dividend for a period of 20 years and issued interest-bearing "dividend notes" to shareholders evidencing the right to receive such dividend. Angers J. applied Associated Insulation Products in finding that the taxpayer had not received interest, dividends or profits ... from stocks, or from any other investment" in the year in which the dividend was declared.

See Also

Clark v HM Revenue and Customs, [2020] EWCA Civ 204

there can be a payment even where there is a resulting trust in favour of the payor

The taxpayer, a retired UK businessman, implemented a scheme to transfer funds (the “Suffolk Life Transfer") from his self-invested personal pension plan ("SIPP") to a second pension scheme (the “LML Pension,” of which the taxpayer was the sole member and whose named employer was a Cyprus company that entered into an employment contract with the taxpayer) in order to free up those funds for investment by him in the London residential property market. The SIPP then was likely terminated.

Unbeknownst to the participants, the LML Pension was void for uncertainty, as to which Henderson LJ stated (at para. 37):

It is agreed … that the effect of the failure of the trusts of the LML Pension is that the transfer conveyed only bare legal title to the money, because an immediate resulting trust arose by operation of law.

In rejecting a submission that this meant that there had been no payment out of the SIPP to the LML Pension, so that there thus had been no unauthorized funds payment that attracted tax and penalty tax, Henderson LJ stated (at paras. 40-41, 45):

[T]he natural reaction of anybody to the question whether there had been a payment of the £2.115 million by Suffolk Life to the LML Pension would surely be that of course there had. The money was intended to pass from the control and supervision of one registered pension scheme to another … . From a practical and common-sense perspective, why should it make any difference to this analysis if it later transpired that, unknown to everybody at the time, the transfer was in fact defective and gave rise to a resulting trust? In the context of the carefully designed scheme of the 2004 Act, one would not expect the meaning of an everyday word like "payment" to depend on legal niceties of that kind.

… That conclusion is only reinforced when one looks at the use which he has, in practice, been able to make of the money over the last ten years.

... [P]roperty which is transferred to or in respect of a pension scheme member in breach of trust is always potentially liable to end up in the hands of a bona fide purchaser for value without notice, in which case the position will in substance be the same as if beneficial title to the property had been transferred from the outset. To my mind, this reinforces the unreality of the construction of "payment" for which Mr Clark contends.

Black v. The Queen, 2019 TCC 135

advance on another party’s behalf established a loan

The taxpayer (“Black”) controlled both Hollinger Inc. (“Inc.”) and Hollinger International Inc. (“International”). The Delaware Court of Chancery ordered Black and Inc. jointly to pay to International damages equalling the amount of a “non-compete” payment of U.S$16.6 million that International had paid to Inc., plus interest thereon. Black used money borrowed from a third party to pay all of such damages, but successfully argued that he had advanced such funds on behalf of Inc. in satisfaction of an interest-bearing loan that he had orally agreed to make in the same amount to Inc. Rossiter CJ stated (at para. 132):

Black’s direct advancement of funds to International on Inc.’s behalf is not a bar to a loan existing between Black and Inc. …[An] advance on another party’s behalf can support a binding loan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) an ancillary income-earning purpose for making a loan whose terms were never finalized was sufficient to satisfy s. 20(1)(c)(i) 659
Tax Topics - General Concepts - Effective Date loan was effective even though never documented and ultimately repudiated 380

Borealis Geopower Inc. v. The Queen, 2018 TCC 189 (Informal Procedure)

taxpayer had "physically" received govenment assistance funds with freedom to transfer

Although all the conditions for the receipt of government assistance had not yet been (and never were) satisfied, Campbell J found that the taxpayer had “physically acquired” the funds in question through depositing a cheque to a trust account of its own formation and thereafter disbursed the funds out of the account to fund its project without any practical hindrance by the government foundation in question (which appeared to have waived the condition referred to above). Accordingly, she found that the taxpayer had in fact “received” the assistance in question at that time for purpose of a grind to its SR&ED expenditures under s. 37(1)(d).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 37 - Subsection 37(1) - Paragraph 37(1)(d) taxpayer had “physically” received unearned government assistance because it had authority to deal with the funds 243
Tax Topics - Income Tax Act - Section 162 - Subsection 162(11) loss carryback did not reduce late-filing penalty or interest 278

Blott v. The Queen, 2018 TCC 1 (Informal Procedure)

giving a spouse access to a joint account was not payment to her

The taxpayer was a market dealer with a securities dealer (“WCM”), which provided support in the form of an assistant, shared with others and it answered “no” to the question in the T2200 as to whether the contract of employment required the taxpayer to pay for an assistant. For 2011 and 2013, the taxpayer claimed that he paid his wife $12,000 annually for the handling of administrative and expense related matters. The Minister denied an employment expense deduction.

C. Miller J dismissed the case, finding (at paras 11, 13 and 14):

… There are no cheques to Ms. Thériault. Mr. Blott’s income went into the joint account and Ms. Thériault could simply access it. Is there any amount paid to Ms. Thériault in such circumstances? I conclude there is not. … I do not see how anything has been paid or expended to Ms. Thériault. She has received nothing more than what she already had.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(i) - Subparagraph 8(1)(i)(ii) retaining an assistant was not a requirement of employer 121

Markou v. The Queen, 2016 TCC 137

funds in leveraged donation scheme essentially advanced by lender directly to charity

A Quistclose trust (as described by C. Miller J ) provides an equitable remedy to a lender where it has lent to a borrower for a specific purpose and it is exposed to the risk of other creditors snatching the advanced funds before the borrower uses them for the intended purpose. C. Miller J made a Rule 58(1) determination that no Quistclose trust attached to the funds advanced by the lender under a leveraged donation arangement because the funds essentially were advanced by the lender directly to the charity rather than, on a realistic view, passing first through the hands of the borrower taxpayers.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) TCC had jurisdiction to determine that no lender equitable remedy (under Quistclose trust doctrine) attached to leveraged donation advances 425
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 TCC has jurisdiction to determine existence of equitable remedy 96

M. Soutar Decor 2000 Ltd. v. The Queen, 2016 TCC 62 (Informal Procedure)

seizure of a guarantor’s security constituted a transfer

Bocock J found that when a bank seized the security (a GIC) provided by a tax debtor to secure his guarantee of a bank loan to his son’s company, this constituted a transfer of property by him to that company for s. 160 purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) transfer from guarantor by virtue of seizure of security by tax debtor’s bank 308

Blank v. Commissioner of Taxation, [2015] FCAFC 154, aff'd [2016] HCA 42

payments under phantom units not received when they vested

In 1994, a non-resident executive was granted units which entitled him, on retirement, to receive payments calculated by reference to the consolidated profits of Glencore International AG, a Swiss corporation ("GI"). He retired at the end of 2006, and became entitled to receive U.S.$160 million in instalments commencing in July 2007. He and Glencore then agreed (pursuant to an agreement which was not executed until January 2008) that the first four instalments would be paid by GI to the Swiss taxing authority (the FTA) in satisfaction of Swiss withholding tax on the U.S.$160 million. This remittance occurred in 2008.

The relevant Australian tax law provided that, in the case of a reward for personal service, the income “derived” by the taxpayer is the “amount…actually received in the year in question” (Brent, 125 CLR 418, at para. 13), and a deeming provision specified that “you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."

The Full Court of the Australian Federal Court held that although two of the four instalments were due to him in 2007, they were not income to him until 2008 when they were paid on his behalf to the FTA, stating (at para. 95):

The… Commissioner’s submission… postulates that income is relevantly “dealt with” on behalf of a taxpayer when the debtor (here GI) refrains from making payment of a debt due to the taxpayer at the creditor’s request. Brent v Federal Commissioner of Taxation [1971] HCA 48; 125 CLR 418 ...indicates that more is required… . There was therefore no derivation of income in the 2007 income year when the first two instalments, though due, were merely withheld from payment to the appellant. … The applicant derived the first two instalments as income when, in January 2008, they were paid, with his agreement, to the FTA by GI on his behalf.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) phantom profit participation unit amounts not income until paid by employer rather than when due 737
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(i) no apportionment possible between resident and non-resident services 286

Great-West Life Assurance Company v. The Queen, 2015 TCC 225

constructive receipt by relieving obligation to pay pharmacist

The appellant ("Great-West") provided prescription drug plans to the employees of various employers. The claims were processed by a third party ("Emergis") using its "Assure Card System." The plan members' claims were adjudicated electronically immediately upon being charged for filling a prescription at a participating pharmacy. Emergis would then reimburse the pharmacies for the claim amount, and submit periodic invoices to Great-West.

In explaining his finding (at para. 81) that "the essential character of the supply provided by Emergis to Great-West is the payment to the plan member of the drug benefit claimed by the plan member under a group health benefits plan," Owen J stated (at para. 82):

In the past, the entitlement to the benefit would have been satisfied by the issuance of a cheque to the plan member. Under the Assure Card system, the entitlement is satisfied by relieving the plan member of the obligation to pay the amount of the benefit to the pharmacy at the point of sale. The result is the same. The plan member constructively receives at the pharmacy counter the benefit payable to him or her under the terms of the group health benefits plan.

See summaries under Financial Services and Financial Institutions (GST/HST) Regulations, s. 4(2) and s. 123(1) – financial service – (f.1) and (r.4).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Regulations - Financial Services (GST/HST) Regulations - Subsection 4(2) electronic drug plan adjudication and processing was "quintessentially administrative in nature" 279
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (f.1) essential character of drug claim processing service was providing payment to the claimant 306
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (r.4) services described in (r.4) did not represent the essential character of drug claim processing service 269
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (r.5) essential character of drug claim processing service was providing payment to the claimant 186

Dimane Enterprises Ltd. v. The Queen, 2015 DTC 1013 [at 64], 2014 TCC 334

payments not received where children "recipients" had no control over funds

Purported distributions out of a purported EPSP to children employees of the taxpayer were to a bank account controlled by the father, so that the participants "never had control of these funds" (para. 40), and so that the "real transactions" were "the payment of amounts by the corporation to the father" (para. 42). See detailed summary under General Concepts –Sham.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham purported recipients of trust distributions had no control over funds 242
Tax Topics - Income Tax Act - Section 144 - Subsection 144(1) - Employee Profit Sharing Plan purported recipients of trust distributions had no control over funds 242

Transalta Corporation v. The Queen, 2012 DTC 1106 [at 3044], 2012 TCC 86

past services

Margeson J. accepted (at para. 99) that employees to whom the taxpayer issued shares in payment of bonuses to them gave consideration equal to the full value of those share "on the basis of past unremunerated services rendered to the Appellant."

McKenzie v. The Queen, 2011 DTC 1216 [at 1274], 2011 TCC 289

payment through back-to-back promissory notes

In settlement of a suit by the taxpayer, who was an income beneficiary, the settlement agreement provided for the payment by the trust to her of $1.7 million in satisfaction of her interest in the trust. Through a numbered company, the capital beneficiary issued a promissory note to the trust for $1.7 million in exchange for shares held for the taxpayer. The trust issued a promissory note to the taxpayer in the same amount. The trust's law firm then gave the taxpayer a certified cheque for $1.7 million to discharge the trust's promissory note.

In finding that these transactions qualified as a distribution by the trust, Boyle J. rejected the Minister's argument that the money was never the property of the trust, but rather was property of the beneficiary's numbered company. The transfer of promissory notes was a transfer of trust property. He stated (at para. 21):

Surely [the Minister] would not seriously have contested a bill of exchange involving a bank and I have been provided with no persuasive argument that enforceable promissory notes from solvent entities should be treated any differently.

Boyle J. also found that the property had been distributed to the taxpayer. He stated (at para. 22) that "[t]here is no apparent reason put forward to suggest that the term 'distributed' should not be given its ordinary meaning."

Words and Phrases

Newmont Canada Corporation v. The Queen, 2011 DTC 1117 [at 628], 2011 TCC 148, aff'd 2012 DTC 5138 [at 7292], 2012 FCA 214 supra

no implied set-off

The taxpayer acquired a 100% undivided interest in a property (the "Quarter Claim") adjoining its "Golden Giant" mine subject to a 50% net profits royalty in favour of the vendor ("Teck/Corona"). In finding that the payment by the taxpayer of 50% of the net profits from the mining operations it conducted on the Quarter Claim did not entail a "reimbursement" by Teck/Corona for 50% of the mining taxes that the taxpayer paid as an expense of that operation, D'Arcy J. stated (at para. 77):

The allocation of revenue from the Golden Giant Mine to the calculation of the Quarter Claim Royalty was not payment of an amount by Teck/Corona. [The taxpayer] as the owner of the Golden Giant Mine (including the Quarter Claim) realized all revenue from mining the Golden Giant Mine. This revenue was not the revenue of Teck/Corona. Teck/Corona was only entitled to receive an amount as a royalty. Further, such royalty was only payable if the Royalty Account showed a credit balance.

Words and Phrases

Sochatsky v. The Queen, 2011 DTC 1065 [at 346], 2011 TCC 41, 2012 TCC 65

bonus booked as loan back/constructive receipt

The individual taxpayer was found to have received a bonus from a closely-held corporation in the year that the corporation declared the bonus rather than in the subsequent year of payment in light of the withholding and remittance of source deductions on the full amount of the bonus in the first year, the booking by by the corporation in that year of a loan back to it of the net bonus proceeds and the absence of any evidence that this was done without his knowledge or consent. Jorré J. also quoted (at para. 78) with apparent approval a statement of commentators that "when money is paid by an employer to a third party for the benefit of the taxpayer, the payment constituted constructive receipt in the hands of the taxpayer."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) amount booked as loaned-back bonus was remuneration 186
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 168

Merchant v. The Queen, 2010 TCC 467

set-off of debt constituted payment thereof

The shareholder of a Canadian company (“Merchant 2000”) lent U.S. $650,000 to a wholly-owned U.S. subsidiary (“Merchant U.S.”) of Merchant 2000, and subsequently transferred that receivable to Merchant 2000 in exchange for a receivable from Merchant 2000 of $650,000. Merchant 2000 owed a $650,000 debt to Merchant U.S. Accordingly, Merchant 2000 had a receivable from Merchant U.S. of $650,000 and owed a debt to Merchant U.S. of $650,000. Merchant 2000 and Merchant U.S. set-off their debts against each other.

One of the issues addressed by raised by Paris J was whether the set-off resulted in payment of the debts, as to which he stated (at para. 41):

Parties may agree to set off amounts due rather than pay money back and forth, and the set off will constitute payment and receipt of the amounts, respectively. (See for example: Armstrong … 88 D.T.C. 1015 … .)

Johnson v. The Queen, 2010 DTC 1213 [at 3568], 2010 TCC 321 (Informal Procedure)

frequent flyer points

Frequent flyer points applied by the taxpayer to purchase air tickets to Chicago for medical treatment there constituted "an amount paid" for purposes of s. 118.2(2)(g).

Innovative Installation Inc. v. The Queen, 2009 DTC 1388 [at 2135], 2009 TCC 580, aff'd supra

receipt when payment to creditor

After noting (at para. 21) that "the case law is clear that an amount may be included in income even where it is only notionally or constructively received", McArthur, J. went on to find that the taxpayer had received insurance policies under a policy that had been assigned by it to a bank given that it benefited from the insurance proceeds being applied to pay off a loan owing by it to the bank.

O'Dea v. The Queen, 2009 DTC 912, 2009 TCC 295

no evidence of payment through off-settable cash

Promissory notes owing by the taxpayers, which were consideration for their acquisition of units of a limited partnership, provided that the interest thereon was to be paid by way of set-off against distributions otherwise payable by the partnership to the taxpayers. In fact, the partnership did not generate distributable cash and, particularly for the first taxation year in question, there was no evidence that interest was paid through the making of timely journal entries. Accordingly, the amounts represented by the notes were limited recourse amounts.

Collins & Aikman Products Co. v. The Queen, 2009 DTC 1179 [at 958], 2009 TCC 299, aff'd 2010 DTC 5164 [at 7293], 2010 FCA 251

payment by direction
aff'd on other grounds 2010 DTC 5164 [at 7293], 2010 FCA 251

A Canadian corporation ("C&A") paid two dividends to its Canadian-resident parent ("Holdings"), which distributed the same amounts to its U.S.-resident parent ("Products") as distributions of paid-up capital. Boyle J. noted (at para. 21) that there was no dispute that a distribution of stated capital by a Canadian corporation, that did not have a bank account, to its non-resident shareholder had been paid by it through directions in respect of a dividend payable to it by its subsidiary:

Since Holdings did not have a bank account, in each case the amount of Holdings' return of capital to Products was distributed electronically from C&A's bank account directly to Products' bank account. There was no dispute that C&A was acting as Holdings' agent in this regard with satisfactory directions and financial reporting.

WPH Mechanical Services Ltd. v. The Queen, 2007 DTC 263, 2006 TCC 677

payment by demand loan

t was found that bonuses declared payable by the taxpayer to its two directors were paid by it within the 180 day period referred to in s. 78(4) pursuant to a demand loan agreement (notwithstanding that the directors did not report the portion of the demand loan that was not paid in cash until the subsequent year as employment income until that subsequent year).

Aprile v. The Queen, 2005 DTC 585, 2005 TCC 216 (Informal Procedure)

payments in kind

Bell J. rejected the Crown's submission that the taxpayer can only make a deduction under s. 8(1)(i) for amounts paid in cash or by cheque with proof of payment, and found that the taxpayer was entitled to a deduction under s. 8(1)(I)(ii) for snowmobiles, motorcycles and gasoline that he had purchased for his sons as payment for their services in performing mailings to 2,500 people on five different occasions in the year.

Hill v. The Queen, 2002 DTC 1749 (TCC)

funds to support cheques

Miller T.C.J. noted that with respect to the situation where the taxpayer, which owed approximately $60 million in accrued interest, paid $60 million to the creditor at the same time that the creditor paid $60 million to the taxpayer as an addition to the advances owing by the taxpayer, that he had difficulty identifying any moment in time at which the taxpayer did not owe $60 million to the creditor. Nonetheless, the transaction was found to constitute a payment of $60 million by the taxpayer to the creditor because, unlike the Cox case (71 DTC 5150), in this case both the taxpayer and the creditor had arranged for sufficient funds such that the cheques would be honoured, and in fact were honoured:

"It was not a matter of each side relying on the other side's funds for their cheques to be honoured."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) 213
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) no Crown explanation of different treatment of simple interest 241

MacNiven v. Westmoreland Investments Ltd., [2001] 1 All ER 865 (HL)

interest paid with loan

In order to generate an interest deduction for accrued interest owing by an insolvent company ("WIL") to its shareholder (a pension fund) pursuant to a provision of the Corporation Taxes Act 1988 (U.K.) which required that interest be paid in order to be deductible, the pension fund lent money to WIL with WIL using the borrowed proceeds to pay the outstanding arrears of interest. In finding that this arrangement was effective, Lord Nicholls stated (at pp. 868-869) that "prima facie, payment of interest in s. 338 has its normal legal meaning, and connotes simple satisfaction of the obligation to pay ... . Leaving aside sham transactions, a debt may be discharged and replaced with another even when the only persons involved are the debtor and the creditor".

Fleishman v. The Queen, 98 DTC 1836, [1998] 3 CTC 2096 (TCC)

creditor may apply payment as it determines if debtor does not

'The taxpayer received two cash payments of $10,000 and $25,000 on an interest-bearing promissory note for $525,000 owing by an arm's length debtor. The payments were found by Mogan J not to have been appropriated by the debtor as between interest or principal, and to have been applied by the taxpayer to principal. Mogan J found (at para. 11) that the payments were of interest rather than of principal on the basis of the doctrine that "in the absence of any appropriation made by the debtor, the creditor may direct his payment to be applied as he thinks fit."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) payment applied by creditor to principal 70

Gibson v. The Queen, 95 DTC 749, [1996] 1 CTC 2105 (TCC) (Informal Procedure)

payment in kind if agreement as to the amount

The taxpayer transferred his equity in a house to his former spouse in satisfaction of arrears of alimony or maintenance owing to her of $19,946. In finding that this constituted a payment of such arrears, O'Connor TCJ. stated (at p. 752) that "payment in kind, provided there has been an agreement or a binding determination of the value in money of the object given, will suffice ... . To do otherwise would seem to run counter to the definition of 'amount' in subsection 248(1)".

Phillips v. The Queen, 95 DTC 194, [1994] 2 CTC 2416 (TCC)

book entry did not give rise to receipt

In finding that the redesignation of a 'bonus payable' to 'due to shareholder' did not constitute the receipt of an amount giving rise to income in the taxpayer's hands, Bowman TCJ. stated (at p.196):

"Nor can I accept that the mere bookkeeping entry of moving the amount of bonus owing to Mr. Phillips from 'bonus payable' to 'due to shareholder' connotes receipt. Accounting entries are supposed to reflect realities, not create it ...".

and went on to refer to the decision in Gresham Life Society Co., Ltd. v. Bishop (1902), 4 TC 464 (HL) [below].

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 103

Blais v. MNR, 92 DTC 1497 (TCC)

payment references funds transfer

A taxpayer was ordered in 1984 to retain arrears of alimentary allowance that had accumulated from March 1983 onward to be applied against an amount owing to him by his estranged wife. In finding that the alimentary allowance was not "paid" by him for purposes of s. 60(b), and was not "received" by her for purposes of s. 56(1)(b), Garon J. stated (p. 1499):

"... The verb 'pay' in the context of that paragraph means a transfer of money, a handing over of funds ... [and] the expression 'received' involves the idea of being put in possession of something."

Ed Sinclair Construction & Supplies Ltd. v. MNR, 92 DTC 1163, [1992] 1 CTC 2218 (TCC)

no payment by mere book entry

Bowman J. stated:

A mere bookkeeping entry in a loan account by itself does not constitute a taxable event unless there is something more, such as receipt. In Gresham Life Society Co., Ltd. v. Bishop (1902), 4 TC 464 at 476 [sic, 475 - see also summary below], Lord Brampton said:

My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g. by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.

Re Charge Card Services Ltd., [1988] 3 All E.R. 702 (C.A.)

card acceptance was payment

A company issued charge cards to cardholders who would obtain petrol from garages by presenting the card and signing a sales voucher completed by the garage. Because the acceptance of the card by the garage constituted unconditional payment for the petrol, the garages following the insolvency of the company had no entitlement to receive payment for the petrol directly from cardholders.

Associated Insulation Products, Ltd. v. Golder (1944), 26 TC 231, [1944] 2 All E.R. 203 (C.A.)

issuance of debt certificates not payment

An American corporation passed a resolution providing "'that a distribution of seven per cent on the capital stock of this corporation, amounting to $52,500 dollars, be and the same is hereby declared, payable on the 15th December, 1936'" and went on to provide that the distribution should not be payable in cash, but in the form of certificates of indebtedness bearing interest at 4%, and payable approximately four years later. In finding that there was no "income arising from possessions out of the United Kingdom" to the U.K. shareholder, Scott L. J. concluded that "the reality of the transaction was the declaration of a money dividend payable not presently, but only on a future date", rather than "a distribution by way of dividend not of money but of money's worth" (at p. 203, All E.R.).

Cross v. London Provincial Trust Ltd., [1938] 1 All E.R. 428 (C.A.)

no payment on capitalization of interest

The taxpayer, who held bonds on which the payment of interest had been suspended, exchanged his matured interest coupons on the bond for interest-bearing 20-year funding bonds of the debtor. In finding that the funding bonds did not constitute "income arising from securities outside the United Kingdom", MacKinnon L.J. stated (at p. 435) that "there can never be payment of its debt by a debtor by giving his own promise to pay at a future date ... though income arises to a creditor from a debtor's paying his debt, income does not arise by the debtor's promising that he will pay his debt later on".

Gresham Life Society Co., Ltd. v. Bishop (1902), 4 TC 464 (HL)

no constructive receipt

The taxpayer, a UK life insurance company which was managed in London and had foreign branch businesses, was assessed for interest and dividends which it received on foreign securities held in the hands of agents abroad, and which were reinvested abroad, on the basis that it received such income in the U.K. In finding that the taxpayer was not taxable on such amounts, Lord Brampton stated (at p. 475):

[I]t is conceded that no part of the money in question was ever received in the United Kingdom in specie… . But it was argued that… it was "constructively" so received in the accounts of the Society. …If it means something differing from or short of an actual receipt, then it seems to me that a constructive receipt is not recognised by the Statute, which in using the word "received" alone, must be taken to have used it having regard to its ordinary acceptation. … I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute… . But…[a] mere entry in an account which does not represent such a transaction does not prove any receipt… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a) no constructive receipt 210

Administrative Policy

29 March 2021 Internal T.I. 2020-0865791I7 - CEWS - eligible remuneration

remuneration not considered to be paid by journal entry

The CEWS (wage subsidy) is generated based on the amounts of “eligible remuneration paid to the eligible employee.” CRA stated, in the context of an employee who also was the controlling shareholder of the eligible entity, that “where salary and wages are only reflected by journal entry as an expense by the employer with a corresponding credit to a due to shareholder loan account, such salary and wages are not considered eligible remuneration paid to an eligible employee.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(2) remuneration not paid by journal entry 164
Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration - Paragraph (c) eligible remuneration that is returned to the eligible employer as a capital contribution or shareholder loan adjustment is excluded for CEWS purposes 187

29 September 2020 External T.I. 2018-0757501E5 F - Crédit pour intérêts sur les prêts étudiants

capitalization of interest on a novation under Quebec law would constitute its payment

A Quebec post-secondary student loan program provided for an initial 12-month “full exemption period” (in which the Quebec government paid the interest charged on the loan by the lender) and a subsequent six-month “partial exemption period” (during which the student borrower was required to pay interest on the loan balance). Following the expiry of this 6-month period, any unpaid interest was capitalized. In addressing whether such capitalized interest qualified as being “paid” under a “loan made” under the Quebec financial assistance program so as to generate a credit under s. 118.62, CRA stated:

By virtue of the Civil Code of Quebec, there can be payment where there is a handing over of money [(“tradition d’argent”)] between the debtor and the creditor or where there is novation by change of debt.

… The mere addition of accrued interest to the principal amount of an original debt is generally not sufficient in itself to constitute a payment of such interest.

If … the addition of interest to the principal … qualifies as a novation … the amount of interest will be considered paid when the novation occurs and will be eligible for the credit by virtue of section 118.62, if all the conditions set out in that section are otherwise satisfied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.62 capitalization of interest on a novation would constitute its payment – but novated loan would be a new non-student loan 221
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(d) capitalization of unpaid interest by way of novation constituted its payment 66

13 August 2020 External T.I. 2019-0802891E5 F - Unclaimed RRSP Benefits

constructive receipt of amount deducted on account of fees that were the recipient’s obligation

The estate of the deceased annuitant of an RRSP was fully settled without the executor (his surviving wife and the sole beneficiary) being aware of the RRSP. Later, the RRSP became unclaimed property and the Quebec Commission for dealing with unclaimed property (the “DPBNR”) instructed the RRSP issuer to liquidate the RRSP and remit the proceeds in cash to it. In a subsequent taxation year, the surviving spouse claimed and received the amount from the DPBNR as the sole estate beneficiary. The amount received by her was net of fees that were imposed by the DPBNR, which were treated under the unclaimed property legislation and regulations (the “UPA and RUPA”) as an obligation of the beneficiary. In finding that there was constructive receipt by her of the portion of the amount against which such fees had been levied, CRA stated:

These fees, which are levied under the provisions of the UPA and the UPA, are imposed in satisfaction of a legal obligation of the beneficial owner to pay them. In this regard, we are of the view that, for purposes of the Act, such amounts are to be considered as having been received (footnote 5 [citing Toth, 2006 TCC 116]) by the beneficial owner for the purposes of the relevant provisions. In this context, we are of the view that the beneficial owner is considered, for the purposes of the Act, to have received not only the amount physically paid to her by the DPBNR but also amounts levied as fees by the DPBNR in satisfaction of a legal obligation of the beneficial owner, in accordance with the provisions of the UPA and the RUPA.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(1) - Benefit - Paragraph (a) benefit includible in deceased annuitant’s return was not subject to "benefit"-(a) exclusion because it was not reported 312
Tax Topics - Income Tax Act - Section 146 - Subsection 146(8) s. 146(8) benefit paid to the taxpayer’s administrator was not includible in her income until the year she was identified and received the amount 369
Tax Topics - Income Tax Act - Section 146 - Subsection 146(4) - Paragraph 146(4)(c) tax imposed on RRSP under s. 146(4)(c) where RRSP issuer unaware of annuitant’s death 187
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose fees incurred as a consequence of receiving unclaimed property (which was taxable under s. 146(8)) were non-deductible 205
Tax Topics - Income Tax Act - Section 9 - Timing receipt of income by an administrator was not income of the beneficial owner until the year she was identified 350

14 May 2019 CLHIA Roundtable Q. 3, 2019-0799111C6 - 2019 CLHIA Q3 - 3rd party RRSP contributions

payment at direction of annuitant is payment by annuitant

CRA indicated that it is acceptable for an RRSP contribution to be received from a third party (i.e., drawn on a bank account other than the annuitant’s) “provided that the payment is made at the direction or with the concurrence of the annuitant of the RRSP,” so that the RRSP receipt should be issued by the financial institution to the annuitant.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(5) a 3rd party can make an RRSP contribution 162

2 April 2019 Internal T.I. 2016-0649821I7 F - Unclaimed superannuation or pension benefits

amount received in Year 2 in lieu of pension benefit includes source deductions in Year 1

Although CRA usually applies its constructive receipt concepts in the context of employment income recognition, it has applied that concept to pension income recognition under s. 56(1)(a)(i). A survivor benefit under a registered pension plan (“RPP”) is paid in a taxation year to the Quebec Unclaimed Property Directorate pursuant to the Quebec Unclaimed Property Act because the person entitled thereto (the “right-holder”) has not been determined. That person, when subsequently identified, receives from the Directorate the net amount that the Directorate, in turn, had received from the RPP, i.e., the survivor benefit payable under the RPP (as reduced by income tax source deductions) paid by the Directorate to the right-holder, as further reduced by its administration fee.

CRA indicated that the amount to be included under s. 56(1)(a)(i) in the right-holder’s income is the gross amount of the survivor benefit payable under the RPP, as indicated in the T4A slip issued by the RPP administrator, which should be included for the taxation year in which the Directorate transferred that amount to the right-holder. Its reasoning was that the amount could not be considered to be “received” as a pension benefit in the year of payment by the RPP administrator to the Directorate because the right-holder had not yet been identified – whereas in the subsequent year of payment over by the Directorate to the right-holder, that right-holder is receiving that amount under s. 56(1)(a)(i) as being “in lieu of” a superannuation or pension benefit.

CRA further stated:

[I]t is the gross amount of the survivor benefit, as shown on the T4A slip issued by the RPP administrator, that must be included in computing the income of the right-holder, even if the right-holder does not physically receive the full amount. In other words, the right-holder is, for the purposes of the Act, considered to have received not only the amount physically paid to the right-holder by the DPBNR but also the amounts that were withheld by the RPP administrator for (federal and provincial) taxes of the right-holder, as well as the fees charged by the DPBNR

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) subsequent year’s payment of benefit to a previously-unidentified beneficiary is only income in that year as an “in lieu of” pension amount 628

5 October 2018 APFF Financial Strategies and Instruments Roundtable Q. 10, 2018-0761551C6 F - Attribution rules and promissory note

promissory note could not be issued as payment in context of income attribution rules

Where a loan is made to a spouse at the prescribed interest rate, s. 74.5(2) requires that each year’s interest be “paid” by January 30 of the following year. CRA considered that the context and purpose of the income attribution rules:

favours a more restrictive interpretation of the word "paid", according to which the issuance of a note, although irrevocable, unrestricted and payable on demand, does not satisfy the requirement provided for in those [provisions].

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(2) - Paragraph 74.5(2)(b) accrued interest cannot be “paid” for s. 74.7 purposes by issuing a promissory note 242

S3-F6-C1 - Interest Deductibility

Capitalization of interest not treated as payment thereof

1.83 In circumstances where accrued interest is added to the outstanding principal amount of an existing loan resulting in a new obligation or novation, an interest payment will not be considered to have been made. A portion of the interest charged in respect of the new loan will constitute compound interest and may only be deductible under paragraph 20(1)(d) in the year it is paid. It is a question of fact whether a transaction results in the payment of interest from a second borrowed amount, or results in the addition of accrued interest to an outstanding principal amount with the creation of a new loan.

17 June 2014 External T.I. 2013-0506731E5 - Immigration

note satisfied dividend

An individual shareholder immigrates to Canada, thereby becoming a Canadian resident. NRCo issues a $1,000 promissory note to her in satisfaction of a dividend declared before her immigration (with the note being paid after the immigration). The dividend would be considered received at the time when the shareholder was still a non-resident of Canada on the presumption (applying Banner Pharmacaps) that the note was issued and delivered to her in satisfaction of the obligation to pay the dividend.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) dividend receivable acquired on immigration 141
Tax Topics - Income Tax Act - Section 90 - Subsection 90(2) dividend not recognized until paid 180

24 November 2013 CTF Roundtable, 2013-0508151C6 - Upstream Loans

repayment by set-off

A loan or indebtedness will be considered to have been repaid by a debtor by way of set-off against a receivable of the debtor "if the set-off represents a legal discharge of the loan or indebtedness." This generally will be accepted to have occurred "if the intention to do so is evidenced in the relevant books and records including any contracts or agreements between the parties and the accounting records of the parties."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(8) - Paragraph 90(8)(a) repayment by set-off 75

30 January 2014 External T.I. 2013-0515761E5 F - Dividend received

book entries merely record and do not establish that a dividend was paid

A dividend of a taxable Canadian corporation owned by an individual is not paid in money but is recorded in its books as an increase in a loan owing to the shareholder or as a decrease in a loan made to the shareholder. CRA quoted Hickman Motors that "the law is well established that accounting documents or accounting entries serve only to reflect transactions and that it is the reality of the facts that determines the true nature and substance of transactions," and further stated (TaxInterpretations translation):

The necessary documentation must be provided in a particular instance to corroborate that factually and legally a dividend has been paid by the corporation and received by the shareholder. In this regard, book entries are ancillary and serve only to report transactions. ...

[W]e refer you to ... 2007-0229311I7 where the facts of the situation presented did not allow for the conclusion that by virtue of accounting entries, a capital dividend had actually been received by a corporation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a) book entries are ancillary and do not establish receipt 175

11 December 2013 External T.I. 2013-0474161E5 - T-slips and dividend and interest

constructive receipt

Respecting a question as to when dividends are paid and received for T5 purposes, CRA stated:

In Innovative Installation Inc. v The Queen, 2009 TCC 580, the Tax Court of Canada explained that "received" does not require "proceeds to pass directly to the taxpayer. The taxpayer can notionally or constructively receive it."

Therefore, it is our view that, generally, the date on which the dividend is paid, whether by cheque, electronic payment, offset or credit to the shareholder's account, would also be the date on which the amount is received.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a) constructive receipt 98

7 October 2013 Internal T.I. 2013-0504081I7 F - Interaction between 55(2) and 40(1)(a)(iii)

distinction between promissory note as conditional or absolute payment

Vendor sold blocks of shares in the capital of a corporation (the “Purchaser”) to the Purchaser, with the purchase price being payable over a following number of years based a percentage in each year of the annual consolidated after-tax profits of the Purchaser. The deemed dividend arising in the year of the repurchase under s. 84(3) was deemed by s. 55(2) to be proceeds of disposition. Was the reserve under s. 40(1)(a)(iii) available as a deduction from this capital gain?

The Directorate confirmed that 1999-0009295 (respecting the availability of a reserve under s. 40(1)(a)(iii) to a capital gain under s. 55(2) where the capital gain arose on the receipt of a promissory note made as a conditional payment) still was valid. stating:

[A] shareholder would be entitled to the reserve under subparagraph 40(1)(a)(iii) in such a context if the promissory note is considered to have been accepted as evidence of or security for the balance payable of the purchase price of the shares. On the other hand, in a situation where the promissory note is considered as "absolute payment" of the debt, the shareholder would not be entitled to such reserve.

CRA went on to indicate that essentially the same positon applied to the above facts where the unpaid purchase price was not evidenced by a promissory note and was payable on an earnout basis with a prepayment right which had not yet been exercised.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(iii) reserve available for s. 55(2) gain on purchase for cancellation of shares where redemption proceeds payable on an earnout basis 268
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) s. 40(1)(a)(iii) reserve available where redemption proceeds payable on earnout basis 173

6 November 2012 External T.I. 2012-0452531E5 - Satisfactory Evidence of Payment

promissory note accepted as payment

In response to a question as to whether "a demand note payable, which is accepted as absolute payment of salary owing to an employee, constitutes satisfactory evidence of the payment of that salary," CRA stated:

An ordinary promissory note is generally regarded as a promise to pay a debt at a later date, and not as payment of the debt on the date on which the note was issued. However, an amount may be considered to be "paid" by a promissory note if an agreement between the parties clearly indicates that the note was accepted as absolute payment.

13 June 2012 Internal T.I. 2012-0435351I7 F - SEPE - chèques en circulation

in Quebec, payment by cheque does not occur until debiting of bank account

Are the cash assets of Opco reduced by the amount of issued and outstanding cheques that have not yet been cashed? CRA responded:

Under the civil law in force in Quebec, the delivery of an outstanding cheque does not constitute payment … [and] the date of payment of a debt settled by cheque is considered to be the date on which the cheque is honoured or paid by the bank … .

[Here] the cheques in circulation and not yet cashed do not constitute payments of the amounts due to Opco's suppliers and … consequently, there can be no reduction in the amount of the cash of Opco as long as the bank does not honour or pay such cheques.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation outstanding and uncashed cheques did not reduce cash 145

4 July 2011 External T.I. 2011-0401991E5 F - CDA and life insurance proceeds

Insurance proceeds received by borrower where applied to repay its loan

CRA stated:

In factual situations similar to the Innovative Installation case, the CRA will apply the position adopted by the Court in that case.

Consequently, in a situation where a corporation can demonstrate that life insurance proceeds that were paid directly to a financial institution have reduced its debt to the financial institution, the life insurance proceeds will be considered as "received" by that corporation for the purpose of applying subparagraph (d)(ii) of the definition of CDA … .

13 June 2012 External T.I. 2012-0435351E5 F -

issuance of cheque not payment

Cheques issued by Opco but not yet cashed would not reduce its cash on hand given that under the applicable law (the Quebec Civil Code), the issuance of a cheque does not constitute payment, so that the debt is not settled until the cheque is honoured.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation cheques not yet cashed 48

30 March 2011 External T.I. 2010-0390591E5 F - Cotisation spéciale

amounts paid by set-off are both paid even though no movement of funds

All the condo owners in a condo complex that was used only in a high-end commercial accommodation business leased their units to a manager for a share equalling 50% of the aggregate rental income (but with the municipal taxes and condominium fees for common services continuing to be borne by the co-owners directly).

After the manager ceased operations, the syndicate of co-owners took over the operation of the condominium complex, but because there was no working capital, the syndicate retained for a period of 120 days all the revenues generated by the operation of the condominium complex. Now, the syndicate of co-owners has raised a special assessment, corresponding to the amount of the overdue rental income, to serve as working capital for the operation of the commercial accommodation business. Is this special assessment of the taxpayer (one of the co-owners, and amounting in the taxpayer’s case to $7,000) deductible in computing income?

Before addressing the deductibility issue, CRA first noted that this constituted a “compensation” (i.e., set-off) arrangement, and stated:

[T]he two taxpayers involved in the compensation are deemed to have made the payment of their respective debts, even if, in fact, no movement of funds has taken place.

In your situation, the syndicate would therefore be considered to have paid to you the amount of $7,000 in payment as your share of the rental income, which should be included in your income as such, regardless of whether or not that amount was paid to you. For your part, you would be deemed to have paid the amount of $7,000 as a special assessment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing amounts assessed against the taxpayer by co-owners not deductible until expended on or in the business 219
Tax Topics - Income Tax Act - Section 248 - Subsection 248(16) - Paragraph 248(16)(a) - Subparagraph 248(16)(a)(i) addition for GST and subtraction for ITC 141

7 December 2010 External T.I. 2010-0363431E5 F - Date limite cotisation REER

RRSP premium “paid” when cheque received by issuer, not when it’s deposited

In commenting on whether an RRSP premium is considered to have been paid within the first 60 days of a year, CRA stated:

In general, we consider a premium to have been paid on or before the 60th day after the end of the calendar year if the RRSP issuer received a cheque for an RRSP contribution on or before the 60th day, and the date of the cheque is also on or before the 60th day. In the absence of abuse, the date of deposit to the RRSP account will not be a factor that we will consider.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(5) 60-day contribution deadline is met based on receipt of cheque by issuer, not its deposit 122

21 July 2009 Internal T.I. 2009-0322591I7 F - Déduction des intérêts

replacement of note with capitalized note with note for full amount did not constitute payment by novation

The taxpayer purchased assets from the vendor (apparently, a non-resident) in consideration for shares of the taxpayer and interest-bearing debt, that was evidenced by a note providing that unpaid interest could be added to the principal of the note. This was done, and a new note subsequently was issued for the amount of the original indebtedness plus the capitalized interest. Before finding that the issuance of the second note did not constitute a payment by novation, CRA quoted from Quebec commentary that “[a]s a general rule, the mere delivery of a promissory note does not entail novation of the pre-existing obligation” and the “promissory bill is then considered as a simple means of acknowledging the debt.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition replacement of note and capitalized interest by new note with increased amount did not constitute payment by novation of the old debt 193
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(b) issuance of replacement promissory note for amount of previous principal plus capitalized interest was not a crediting of such interest 151

25 March 2009 External T.I. 2008-0300401E5 F - Fiducie en faveur de soi-même - prêt sans intérêt

individual pays trust taxes when he receives trust distributions net of such taxes

CRA indicated that an individual would be considered to be personally paying taxes of a trust that had made a s. 104(13.1) where he received distributions from the trust net of such taxes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) Howson applied to find that non-interest bearing loan by individual to his alter ego trust not subject to s. 75(2)/no contribution if individual pays trust taxes following a s. 104(13.1) election 181
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13.1) s. 104(13.1) election generally available where no s. 75(2) application, which is not engaged by the individual’s payment of trust-level taxes 357
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4.1) s. 56(4.1) inapplicable to NIB loan made by individual to his alter ego trust 139

21 April 2008 Internal T.I. 2007-0251761I7 F - Billet à payer

addition of unpaid interest to principal was not a loan of money, nor a payment or crediting of interest

Debt owing to the taxpayer following an asset sale provided that interest may be added to the principal of the debt, which is what occurred. In finding that the capitalized interest was not a separate loan of money, so that the interest thereon could only be deducted under s. 20(1)(c) rather than (d), CRA stated:

The facts submitted did not show that there was an actual transfer of money, and that the “mere statement that an amount of interest was added to the principal of the original debt does not seem to us sufficient to conclude that there was a … [fresh] loan between the parties.”

In also finding that no Pt. XIII tax had been triggered, CRA applied Quebec Cartier Mining to conclude that the taxpayer did not pay the increased and capitalized interest on an annual basis and did not credit the vendor with such interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(d) addition of unpaid interest to principal did not establish a loan of that interest or a novation of the debt – so that interest on such capitalized interest non-deductible until paid 243
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) addition of unpaid interest to principal was not a payment or crediting of the interest so as to engage Pt. XIII tax 109

14 June 2007 Internal T.I. 2007-0229311I7 F - Capital Dividend Account

making accounting entries does not constitute payment of a dividend

After noting that payment of two back-to-back capital dividends (from “Subco” to “Parentco,” and form it to its individual shareholder) had been accomplished only by accounting entries, the Directorate found that this was insufficient to give rise to a capital dividend “received” by Parentco, so that there had been no addition to its capital dividend account. In this regard, it stated:

[T]he mere making of the accounting entries … does not in itself constitute the payment of a dividend … by either Subco or Parentco. …

[H]owever … a dividend can be paid by a corporation and received by its recipient without any monetary movement, for example, by the issuance of a demand note that is accepted as an absolute payment by the recipient.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (b) recording of dividend payable and dividend receivable between sub and parent was insufficient to constitute the payment of a capital dividend, so that there was no CDA addition 132
Tax Topics - Income Tax Act - Section 184 - Subsection 184(3) invalid payment of capital dividend (because no payment) was subject to Pt. III tax (given valid s. 83(2) election) for which no s. 184(3) election could be made as no payment 135
Tax Topics - General Concepts - Effective Date a declared dividend cannot be revoked 158

17 February 2004 External T.I. 2003-0033915 - Cash pooling - shareholder benefit

no automatic set-off

In indicating that a cash pooling arrangement entered into by a Canadian subsidiary with its non-resident parent corporation could result in an income inclusion under s. 15(2), Revenue Canada indicated that its review of the jurisprudence on s. 15(2) suggested that debts between a shareholder and a particular corporation do not generally offset for purposes of determining either whether the shareholder became indebted to the corporation in the first place, or whether that indebtedness has been repaid.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.6) cash pooling with NR parent 77

IT-243R4, para 5

mere crediting of account

"A corporation is not considered to have paid a dividend when it merely credits a shareholder's account, unless the shareholder is able to withdraw the money credited at any time."

2 April 1998 Roundtable, E9722066 - PROMISSORY NOTE -WHETHER PAYMENT OF DEBT?

promissory note accepted as absolute payment for the transfer of s. 28 inventory

In finding that a cash-basis farmer realized income on the transfer of inventory for a promissory note, CRA stated:

Since the promissory note was accepted as consideration for the transfer of the inventory, and given that none of the documents provide any remedy for non-payment, it appears that payment could only be enforced under the terms of the promissory note. Therefore, on the basis of the documents submitted, it is our view that the promissory note constitutes absolute payment … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 28 - Subsection 28(1) - Paragraph 28(1)(a) promissory note accepted as absolute payment for the transfer of inventory given that no remedy provided for non-payment 145

5 January 1996 CTF Roundtable Q. 31, 9523976 - GROSS-UP PAYMENTS

A gross-up on a debt obligation owing to a Canadian lender will be included in the Canadian lender's income under s. 9 or s. 12(1)(c) even "where the gross-up is paid or credited to the government of a foreign country on the Canadian lender's behalf since the Canadian lender would have constructively received the gross-up".


receipt of cheque (that is not subsequently dishonoured) is payment at that time

A payment by cheque is equivalent to a payment in cash as long as no special circumstances lead to another conclusion, and the cheque is not dishonoured on presentation for payment. Accordingly, where a cash-basis farmer receives a cheque from the Canadian Wheat Board, he will be considered to have received payment at that time notwithstanding that he returns the cheque to the Board for reissue in the subsequent year.

19 June 1995 Memorandum 950842 (C.T.O. "Patronage Dividends Paid by Non Co-ops")

Payment of a patronage dividend may be effected by the issuance of shares or debt instruments, where such an arrangement is authorized by the customer.

7 May 1995 Internal T.I. 9510220 - PART I.3, O/S CHEQUES & OVERDRAFTS

conditional payment principle accepted

Bank overdrafts are considered to have arisen to the extent that they have been utilized or drawn upon. For these purposes, RC, in common law jurisdictions, applies the conditional payment principle (determining the date of payment as the date of delivery of the cheque by a debtor to its creditor) established in such cases as Marreco v. Richardson (1908), 2 K.B. 584, at 593 (C.A.) and Moody v. MNR, 57 DTC 1050, at 1054 (Ex Ct).

6 July 1994 Internal T.I. 9323826 - BONDS ISSUED IN LIEU OF INTEREST

issuance of bonds re accrued interest did not constitute payment thereof

Bonds issued to a Canadian bank in settlement of arrears interest on a non-performing loan of a Brazilian debtor would not be considered to constitute payment by the debtor and receipt by the bank of interest on the underlying loans, in light of the comments in Cross v. London and Provincial Trust Ltd., [1938] 1 K.B.D. 792.

1993 A.P.F.F. Round Table, Q.15

There is no repayment for the purposes of s. 20(1)(hh) when shares are converted to a debt security and the parties are in essentially the same situation before and after the conversion. There also is no repayment of the debt if it is assumed by another taxpayer in connection with the transfer to that other taxpayer of the assets for which the loan was contracted.

26 November 1992 T.I. 923506 (September 1993 Access Letter, p. 411, ¶C20-1161)

For farmers on the cash method, a post-dated cheque that is received on a date that a debt owing to the taxpayer is not yet payable will be brought into income on the earlier of the date the debt becomes payable and the date the cheque is negotiated. However, where a post-dated cheque is accepted as absolute payment of the debt, the amount of the cheque is considered to be income at the time it is received.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 28 - Subsection 28(1) 59

31 August 1992 T.I. (Tax Window, No. 24, p. 8, ¶2184)

A direct payment by a non-resident to Revenue Canada of a tax liability of a related Canadian corporation would entail the receipt of an amount by the Canadian corporation for purposes of s. 12(1)(x).

7 August 1992 T.I. 921752 (May 1993 Access Letter, p. 198, ¶C76-066)

Because the function of a journal entry is to record a transaction rather than to make it legally effective, the reclassification of a shareholder's loan into remuneration payable by a journal entry would not be considered to be payment of the remuneration.

28 July 1992 Memorandum 921859 (April 1993 Access Letter, p. 151, ¶C180-136)

A taxpayer is not considered to have "paid" interest on a loan owing by him to a charitable foundation by virtue only of journal entries being recorded in his ledgers and those of the foundation.

15 June 1992 T.I. 921368 (December 1992 Access Letter, p. 18, ¶C56-208)

No payment will be considered to occur pursuant to an agreement between the parties to the effect that interest on a promissory note will be deemed to be paid and then loaned back to the borrower.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(1) 38

3 July 1991 Memorandum (Tax Window, No. 5, p. 22, ¶1335)

A journal entry recording a transfer of an amount from a salary payable account to a loan from shareholder account does not by itself constitute payment of the salary.

5 July 1990 TI AC59710

Where a promissory note is given in consideration for services, the acceptance of the note would be considered to be an amount received under s. 12(1)(a) where the note has been accepted as absolute payment for the services, whereas if the note has been accepted as conditional payment, s. 12(1)(a) will apply only when actual payments are made on the note assuming the related services have not yet been performed at that time.

85 C.R. - Q.29

Constructive receipt by an employee benefit plan beneficiary occurs when an amount is made available to him without being subject to any restrictions concerning its use.

84 C.R. - Q.13

Under an unfunded deferred compensation plan, constructive receipt is considered to occur in situations where an amount is credited to an employee's account, set apart for the employee, or is otherwise available to the employee without being subject to any restriction concerning its use.

IT-436R "Reserves - Where Promissory Notes are Included in Disposal Proceeds"

Where a promissory note has been accepted as absolute payment for the disposition of a property, no amount is due in respect of the disposition, because the debt is considered to have been paid or satisfied by the receipt of the promissory note.

IT-168R2, para. 3-4

deferred remuneration should be included in income for the year in which the employee is entitled to receive it or actually receives it.

IT-305R3 "Establishment of Testamentary Spouse Trust"

In interpreting the requirement that the spouse must be entitled to receive all the income of a spouse trust that arises before the spouse's death, RC applies the doctrine of constructive receipt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 0

IT-196R2 "Payments by Employer to Employee"

A taxable payment is included in computing the employee's income on the earliest taxation year in which he receives it, absolute enjoyment or use vests in him, or it is paid or transferred pursuant to his direction.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(3) 0


Peter Lee, Paul Stepak, "PE Investments in Canadian Companies", draft 2017 CTF Annual Conference paper

Efficacy of payments by direction (p. 24)

[W]ires are often made directly from the source of the funds (e.g. the PE [private equity] fund capital account, or the lenders' clearing account) to the ultimate destination for the funds (e.g. Target's old lenders, company and seller advisors, the sellers). This is both logical and prudent, but it is critical that the legal flow of funds be properly documented by way of directions, acknowledgements and receipts, to show each legal step that the cash proceeds take on their way from the first step to the last. [fn 129: Any suggestion that such a properly completed and executed direction from each payment recipient (who accordingly conveys consideration in return) is not to be respected as legally effective is, in our view, unsupportable.]

Kevin Bianchini, Reuben Abitbol, "Taxation of Stock Appreciation Rights", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24 No. 8, 2015, p.1655

Safe harbour until SAR vesting (p. 1656)

[T]he CRA has taken the position that until the employee has a right to exercise and cash in the SARs, the SDA rules would not apply. [f.n…. 9422835 …]

In other words, once the SAR units become fully vested it would have be determined whether the executive is postponing the exercise of the SARs in order to avoid the immediate tax consequences (i.e., the employment income). As stated by the CRA, this is a question of fact… .

Alternative application of constructive receipt (“CR”) at time of vesting (p. 1657)

[I]n the context of the recognition of employment income, the Canadian jurisprudence has yet to develop guidance with respect to the doctrine of CR

…[T]he CRA addressed its position with respect to CR in the context of SDAs in… 1999-0007315… .

…As can be seen…the CRA adopts a very broad approach and leaves open the possibility that even if the SDA main purpose test is met, the rules with respect to the doctrine of CR may still be rendered applicable. Hence, in light of the above-mentioned, it seems likely that the SARs would be taxed at the moment they become fully vested regardless of when exercise occurs.

E.G. McKendrick, Chitty on Contracts, Vol. 1, Thirtieth Edition (2008).

Discharge by paying creditor's debt (§21-042, p. 1426)

If the creditor requests the debtor to pay the debt to a third party, such a payment is equivalent to payment direct to the creditor, and is a good discharge of the debt.

Appropriation of payment by creditor (§21-059, p. 1435)

...Where the debtor has not exercised his option, and the right to appropriate has therefore devolved upon the creditor, he may exercise it at any time "up to the very last moment" or until something happens which makes it inequitable for him to exercise it. What is "the very last moment" depends on the circumstances of each case. In one instance the creditor was held entitled, in the witness-box during the course of his action, to exercise his right to appropriate a payment by his debtor, as nothing had previously happened to determine his right of election. The creditor need not make his election in express terms. He may declare it by bringing an action or in any other way that makes his meaning and intention plain. An entry in the creditor's books applying a payment to a particular debt does not constitute an election which will preclude the creditor from afterwards applying it to another debt, unless the entry has been communicated to the debtor. Once, however, the election is made and communicated to the debtor, it is irrevocable.

Appropriation to statute-barred debt (§21-063, p. 1436)

A creditor may appropriate a payment to a debt barred by the Limitation Act 1980, or to a debt which is unenforceable because of some formal defect in the contract.

Appropriation as between interest and principal (§21-067, p. 1437)

Where there is no appropriation by either debtor or creditor in the case of a debt bearing interest, the law will (unless a contrary intention appears) apply the payment to discharge any interest due before applying it to the earliest items of principal.

C.R.B. Dunlop, Creditor-Debtor Law in Canada, Second Edition (1994).

Discharge by paying creditor's debt (pp. 20-1)

As a general rule, a debtor can discharge a debt only by payment to the creditor personally, However, if the creditor asks the debtor to pay a third party and the debtor pays the third party qua agent, such payment will be effective to discharge the debt.

Discharge by agent of debtor or other 3rd party (p. 21)

...The converse situation of an agent or third person paying the debtor's obligation to his or her creditor presents difficult and controversial legal problems. It is of course clear that a debtor can pay a debt through an agent instead of personally. But what happens if a third person without authority pays the creditor? Most debtors (and creditors) would probably welcome such meddling with cries of joy, but there are situations in which the debtor or the creditor may want the debt to continue rather than come to an end.

Appropriation of payment by debtor or creditor (pp. 23-4)

One of the most frequently litigated problems in debtor-creditor law arises when a debtor owing two or more debts to the same creditor makes a payment to that creditor. To which of the debts should the payment be appropriated? The classic statement of the law is to be found in Lord Macnaghten's speech in Cory Bros. & Co. v. "The Mecca", a rule which has been often applied in Canadian cases:

When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor. In 1816, when Clayton's Case was decided, there seems to have been authority, for saying that the creditor was bound to make his election at once according to the rule of the civil law, or at any rate, within a reasonable time, whatever that expression in such a connection may be taken to mean. But it has long been held and it is now quite settled that the creditor has the right of election 'up to the very last moment,' and he is not bound to declare his election in express terms. He may declare it by bringing an action or in any other way that makes his meaning and intention plain. Where the election is with the creditor, it is always his intention expressed or implied or presumed, and not any rigid rule of law that governs the application of the money.

Lord Macnaghten makes it clear that the appropriation by either the debtor or the creditor need not be declared in express terms but may be implied from the appropriator's actions. What is required is that the appropriation, whether expressed in words or implied from conduct, should be communicated to the other party. Thus it has been held that an uncommunicated entry in the creditor's private books is not an appropriation which will preclude that creditor from subsequently making a different application of the payment. On the other hand, once the party does make a communicated appropriation, that party cannot subsequently change the appropriation. The rules in the Cory Bros. case will of course not apply where the parties have previously agreed as to the appropriation of payments.

Appropriation as between interest and principal (p. 26)

Assuming that there is no evidence of the parties' intention, the law will attribute a payment first to interest and then to principal.

Arnold, "Timing and Income Taxation: The Principles of Income Measurement for Tax Purposes", Canadian Tax Paper, No. 71, Canadian Tax Foundation, July 1983

See chapter 3 entitled "Cash Basis Accounting: The Concepts of Receipt and Payment".

Wilson, "Repayment of Shareholder Loans", 1995 Canadian Tax Journal, Vol. 43, No. 3, p. 746.

Includes (at pp. 751-754) a discussion of the Clayton rule.