Paragraph 12(1)(a) - Services, etc., to be rendered


The Queen v. Foothills Pipe Lines (Yukon) Ltd., 90 DTC 6160, [1990] 1 CTC 221 (FCA)

rev'd on other grounds 90 DTC 6160 (FCA)

The taxpayers, which had incurred various expenses in respect of the second phase of a pipeline project which had not yet been constructed, were permitted by the National Energy Board to levy a special charge to Alberta producers of natural gas in respect of those costs. Collier J found that ss.12(1)(a) and (b) did not apply as the taxpayers did not receive the special charges as part of their income earning process, as none of them were rendering any service to the Alberta producers.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Accounting Principles 40

The Queen v. Imperial General Properties Ltd., 85 DTC 5045, [1985] 1 CTC 39, [1985] 1 CTC 40 (FCA)

s. 12(1)(a)(i) inapplicable to deposits

Since s. 12(1)(a)(ii) covers deposits, s. 12(1)(a)(i) was not intended to apply to deposits. Deposits received by a vendor of land were subject to the contingency of possible repayment, and so did not become part of its income until its right to them became absolute.

See Also

Demeterio v. The Queen, 2011 DTC 1148 [at 788], 2011 TCC 192

see also Destacamento v. The Queen, 2009 TCC 242)

The taxpayer earned commissions on his sale of life insurance policies, which he had to repay if the policies were cancelled within two years. Woods J. dismissed the taxpayer's submission that the commissions should only be included in income after two years. The wording of s. 12(1)(a)(i) clearly includes such unearned amounts in the year of receipt. (Woods J. noted that, ordinarily, such income inclusions can be offset under s. 20(1)(m), but that the deduction was not available to the taxpayer in this case because of s. 32.)

Sussex Square Apartments Ltd. v. The Queen, 99 DTC 443, [1999] 2 CTC 2143 (TCC), aff'd 2000 DTC 6548, Docket: A-40-99 (FCA)

assignment of lease v. rent prepayment

The taxpayer, which carried on the business of leasing real property, was the lessee of all but one suite in six three-storey apartment buildings. Amounts which it received for the assignment of some of the leases to prospective "purchasers" gave rise to profits on income account from the disposition of leasehold interests, whereas amounts received for the sublease of other suites for terms expiring one day prior to the term of the headlease gave rise to prepaid rent under s. 12(1)(a). The second category included assignments that were retroactively amended by court order to be subleases, whereas the first category included assignments that subsequently were ostensibly rectified by deed to be subleases without court approval.

Anderson v. MNR, 72 DTC 1263, [1972] CTC 2318 (T.R.B.)

inclusion of cash advance for farmer's grain

The Prairie Grain Advance Payments Act (Canada) enabled prairie farmers to receive cash for their threshed grain in advance of the physical delivery of the grain. A cash payment which the taxpayer received against future delivery of grain was included in his income under s. 12(1)(a). The payment was found not to be an advance under a loan in light inter alia of there being no obligation to repay in actual cash except in case of default.

Dartmouth Developments Ltd. v. MNR, 67 DTC 551, [1967] Tax A.B.C. 780

amount received in substance as deposit not recognized at that time

A developer entered into an agreement with a purchaser of its building lots under which the purchaser (a builder) paid $120,000 to the taxpayer in consideration for the taxpayer granting an "option" to sell the building lots to the purchaser. The sum could be retained by the taxpayer if the option was not exercised in respect of all the lots by the time of expiry of the option, and otherwise was to be applied to the purchase price for the last lot in respect of which the builder exercised the option.

Mr. Weldon found that the $120,000 payment was received by the taxpayer as a deposit to ensure the due completion of what in essence was an agreement of purchase and sale and that this sum was not income to the taxpayer until the time that the last building lot was taken up and paid for by the builder.

Administrative Policy

6 February 2015 Internal T.I. 2015-0566681I7 F - Redevances perçues d'avance

irrevocable royalty prepayment under s. 12(1)(a) or 9

In order that the non-capital losses of Lossco would not expire, an affiliated licensee of a licence to manufacture and sell a product made a purported prepayment of the royalties (which were calculated as a function of sales), but with the prepaid royalty being non-refundable. CRA found that this payment likely was not a royalty (given its non-contingent nature) and that the full amount was business income to Lossco either under s. 12(1)(a) (on the basis, applying Ellis Vision, that it “could be considered as an amount paid in advance for the use of chattels”) or under s. 9.

It was not necessary for CRA to “resolve the issue of which of these two provisions prevails because [Lossco] does not wish to benefit from a deduction under paragraph 20(1)(m).”

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing lump sum irrevocable prepayment of contingent future royalties fully included 239

10 October 2014 APFF Roundtable, 2014-0538131C6 F - revenus d'achats intégrés

full inclusion for in-app sales

A taxpayer who makes In-App sales of life or experience points to gamers has a full inclusion at the point of sale. CRA stated (TaxInterpretations translation):

[T]he taxpayer would cash the amount immediately and the client would receive the supplementary life or experience points from the time the payment was made. The taxpayer would have no further obligation respecting this sale.

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Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) no reserve for extended use by purchasers of in-apps 136

2 April 2013 External T.I. 2013-0475571E5 - Life insurance

In accordance with Destacamento and Demeterio, CRA found several bases on which a self-employed taxpayer's life insurance sales commissions must be included in income the years they are earned, notwithstanding that the taxpayer would be obligated to return ("chargeback") some or all of a commission if a customer cancelled a policy within the first twelve months:

  • The commissions "have the quality of income in the year of receipt" and should be included pursuant to s. 9.
  • Even if the commissions are unearned, they must be included in the year received (s. 12(1)(a)) or to offset amounts advanced in respect of life insurance contracts (s. 32(1)(a)).

Chargebacks would be deductible from income, assuming the chargebacks were incurred for the purpose of earning income from a business.

29 January 2010 Internal T.I. 2009-0339541I7 F - Inclusion au revenu et provision

advance fees for futures goods-handling services included in income under s. 12(1)(a) rather than s. 9

Corporation A, which is involved in the distribution, warehousing, handling, and packaging of goods, invoices and receives revenue currently for such goods processing services to be rendered in the following six to 12 months. In discussing the application of ss. 9 and 12(1)(a), and before going on to discuss the s. 20(1)(m) reserve, the Directorate stated:

The goods processing services to be performed after the end of the year appear to us to be of sufficient importance that the prepayments cannot be included in computing income from a business under subsection 9(1).

On the other hand, since Corporation A received advance payments in respect of goods processing services to be performed after the end of the taxation year, these amounts come within paragraph 12(1)(a) … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) reserve available for future goods handling services to be performed 106
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense no deduction from prepaid fees of estimated cost of performance 94

25 March 1999 Internal T.I. 9828577 - PART I.3/RESERVES,ADVANCES&SURPLUS

upfront fees received on interest/currency swaps likely were includible in income under s. 9 (so that no reserve under s. 20(1)(m) was available) on the basis that that had been legally earned, as the taxpayer was not required to provide any further services or deliver any goods.

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Tax Topics - Income Tax Act - Section 9 - Timing 49

22 July 1992, T.I. 921908 (May 1993 Access Letter, p. 189, ¶C9-262)

Up-front payments received by a marketer of timeshare units in order to provide "floating week leasing options" are amounts to which it is absolutely and unconditionally entitled, with the result that they are included in income under s. 9(1) and not under s. 12(1)(a). Any related costs such as marketing expenses are fully deductible in the same year.

13 May 1992 Internal T.I. 7-921151

Amounts received by gold producers under gold loans are not required to be included in income under s. 12(1)(a).

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 no te 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.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt 75

11 April 1990 T.I. AC58705 File 5-8705

premiums received for the issue of bonds (presumably on income account) were to be included in income at the time of issue under s. 9 rather than s. 12(1)(a) "as the premiums represent consideration for the issuance of the obligations and are received regardless of the period of time that the debt is outstanding." Therefore, under the Robertson test, the taxpayer's right to the premiums is "absolute and under no restriction," so that the amortization treatment available under GAAP was not applicable for income tax purposes. However, even if the bond premiums were instead included in income under s. 12(1)(a), a reserve under s. 20(1)(m) would not be available, so that the full amount again would be income in the year of issue.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 124

IT-165R "Returnable Containers"

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Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) 65


Larry F. Chapman, John M. Ulmer, "Canada", Tax Treatment of Hybrid Financial Instruments in Cross-Border Transactions, International Fiscal Association, Vol. LXXXVa, p. 207.

J. Frankovic, "The Taxation of 'Unearned Income'", Tax Topics, No. 1406, February 18, 1999.

Paragraph 12(1)(b) - Amounts receivable


Canada v. Huang and Danczkay Ltd., 2000 DTC 6549, docket A-500-98, 2002 FCA 226

right to receive amounts had become absolute

The taxpayer, which was a real estate developer, agreed with each of three partnerships to construct and complete a MURB project and provide certain initial services essential to the project pursuant to a development agreement, including the provision of ongoing financial guarantees, in consideration for the partnership's promise to pay stipulated amounts to the taxpayer in instalments as evidenced by promissory notes and, in the case of two of the three projects, wrap-around mortgages. Rothstein J.A. found that the fact that the notes and wrap-around mortgages stated that they were "subject to" the development agreement did not establish that the right of the taxpayer to be paid did not become absolute at the time the debt instruments were made (no term of the development agreement had been identifiued to the opposite effect); and rights of set-off also were not inconsistent with the obligations to the taxpayer being absolute. Accordingly, the amounts stipulated in the debt instruments were receivable for purposes of paragraph 12(1)(b).

La Capitale, Compagnie D'assurance Générale v. The Queen, 95 DTC 5587 (FCTD)

The taxpayer issued insurance policies on an annual basis to its individual customers, and gave them the option of paying their annual premium pursuant to a written form authorizing their employer to make the requisite periodic deductions from their salary. Pinard J. found that the taxpayer had a clear legal right in these circumstances to receive the full premium (with the result that the full premium was "receivable" by it) because the insured individual had taken out an insurance policy giving him the desired protection for a year. However, a portion of the premium amount related to insurance protection provided during the subsequent calendar year, i.e., to a service to be provided beyond the taxation year in question. Accordingly, the portion of each premium that related to the subsequent year was not required to be included in the taxpayer's income under s. 12(1)(b).

The Queen v. Johnson & Johnson Inc., 94 DTC 6125, [1994] 1 CTC 244 (FCA)

Before going on to find that a federal sales tax refund did not represent income in the taxation year in question on another basis, Hugessen J.A. found that it was not receivable by the taxpayer in that year because the Minister had not yet given some public and irrevocable indication thereof.

Stevenson & Hunt Insurance Brokers Ltd. v. The Queen, 93 DTC 5125, [1993] 1 CTC 383 (FCTD), briefly aff'd 98 DTC 6383 (FCA)

Contingent profit commissions, which an insurance broker was entitled to receive from insurance companies in respect of its 1983 fiscal year and that were contingent on the insurance companies' profitability on policies sold by the broker, did not constitute amounts receivable by the broker at the end of that fiscal year given the impossibility of coming to a reasonable estimate of the amount of those commissions at the end of the fiscal year. Rothstein J. stated (p. 5132):

"While estimates and, where necessary, discounting of amounts to be paid in the future appear to be acceptable practice, they must be predicated on an ability to approximate what is expected or knowledge of the amount to be discounted."

Maritime Telegraph and Telephone Co., Ltd. v. The Queen, 92 DTC 6191 (FCA)

The taxpayer was unsuccessful in arguing that the 1983 amendments to s. 12(1)(b) implied that amounts earned for the provision of services do not become income until the billing date, provided that there is no undue delay in billing. S.12(1)(b) operated so as to expand the ambit of s. 9(1), rather than to exclude items which otherwise would be income under s. 9(1).

West Kootenay Power and Light Co. Ltd. v. The Queen, 92 DTC 6023, [1992] 1 CTC 15 (FCA)

A hydro-electric utility included in its income for financial statement purposes an estimate of the value of electricity which have been consumed by its customers between the time they last had their metres read and the year-end and for which they had not yet been billed. In finding that such unbilled amounts were "receivable" by the utility and therefore to be included in its income for purposes of s. 12(1)(b), MacGuigan J.A. stated (pp. 6030-6031):

"I can have no doubt that the Appellant was absolutely entitled to payment for any electricity delivered, and in an amount reasonably estimated. Suppose, for example, that a customer's residence was destroyed by fire at midnight on December 31. The Appellant would surely have a legal right as of the due date to reimbursement for the electricity supplied since the previous billing, viz, through December 31, and a Court would be prepared to fix the amount of entitlement, probably using something like the appellant's pro-rated method....[T]herefore...the appellant had a clear legal right to payment: the amounts in question were sufficiently ascertainable to be receivables even though not yet billed or due...."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 115
Tax Topics - Income Tax Act - Section 9 - Timing estimated amount was income 135

West Hill Redevelopment Co. Ltd. v. The Queen, 91 DTC 5430, [1991] 2 CTC 83 (FCTD)

mortgages included in proceeds at their principal amount rather than lower FMV

A real estate developer which sold condominiums for consideration consisting in part of mortgages of the purchasers bearing interest at a below-market rate was required to include the face amount of the mortgages in its income, notwithstanding that under GAAP it was required to include only their fair market value in computing income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 16 - Subsection 16(1) not applicable where mortgages receivable were all on income account 151
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Inventory 44

West Kootenay Power and Light Co. Ltd. v. The Queen, 91 DTC 5214 (FCTD), aff'd supra.

aff'd on other grounds, supra.

Before finding that an electric utility was not permitted to exclude from its income the value of electricity consumed by its customers for which it had not yet billed them, MacKay J. stated (p. 5220):

"Paragraph 12(1)(b) requires only that amounts receivable be included in income. It does not require the converse - that other amounts not falling within the meaning of 'receivable' be excluded from income."

The Queen v. Imperial General Properties Ltd., 85 DTC 5045, [1985] 1 CTC 39, [1985] 1 CTC 40 (FCA)

balance of purchase price did not become receivable until condition precedent satisfied

An agreement of purchase and sale of land provided for payment of $20,000 of the $844,250 purchase price on the execution of the agreement on October 29, 1968, and for the payment of $50,000 on the "nominal" closing date of October 31, 1968. Since the purchaser could not obtain beneficial ownership of the lands under the agreement until a condition precedent relating to compliance with the Planning Act (Ontario) was fulfilled, and this condition was not fulfilled until 1970, the balance of the purchase moneys (after the receipt of $70,000 in 1968) did not become an "amount receivable" by the vendor until 1970.

The Queen v. Timagami Financial Services Ltd., 82 DTC 6268, [1982] CTC 314 (FCA)

(Obiter) In s."12(1)(b), it was thought necessary, or at least desirable, to make it clear that the word 'receivable' was to include sums which would not, in ordinary language, be considered to be receivable within the particular taxation year".

Wilchar Construction Ltd. v. The Queen, 81 DTC 5318, [1981] CTC 415 (FCA)

Although the Minister cannot require a construction company to include in its income the amount of holdbacks prescribed under the Mechanic's Lien Act (now the Construction Lien Act) and of progress claims for which architect's certificates have not yet been issued, s. 12(1)(b) does not prohibit a construction company from choosing to include such amounts in its income.

Minister of National Revenue v. Benaby Realties Limited, 67 DTC 5275, [1967] CTC 418, [1968] S.C.R. 12

accounts to be left open until determined

In finding that the taxpayer realized income from land inventory in its 1955 taxation year (when an agreement was reached with the Crown fixing the amount of compensation for the expropriation of the land, and that amount was paid) rather than its 1954 taxation year (when the land was expropriated) Judson J. stated (p. 5276):

"It is true that at the moment of expropriation the taxpayer acquired a right to receive compensation in place of the land but in the absence of a binding agreement between the parties or of a judgment fixing the compensation, the owner had no more than a right to claim compensation and there is nothing which can be taken into account as an amount receivable due to the expropriation."

Judson J. also noted (at p. 5276) the principle that "for income tax purposes, accounts cannot be left open until the profits have been finally determined".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing profits recognized when ascertained 87

MNR v. Colford Contracting Co. Ltd., 60 DTC 1131, [1960] CTC 178 (Ex Ct), briefly aff'd 62 DTC 1338, [1962] CTC 546 (SCC)

amount is receivable when an absolute, although not necessarily immediate, right to receive

Holdbacks on contracts for the installation of heating and plumbing systems became "receivable" when the architect's or engineer's certificates were executed, thereby resulting in an absolute entitlement of the taxpayer to receive the holdbacks at a later due date. "[I]t is not enough that the so-called recipient have a precarious right to receive the amount in question, but he must have a clearly legal, though not necessarily immediate, right to receive it."

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 25

Wilson and Wilson Ltd. v. MNR, 60 DTC 1018, [1960] CTC 1 (Ex Ct)

Cameron, J. held that the full amounts covered by interim progress certificates of the supervising engineer became "receivable" for the purposes of the application of s. 85B(1)(b) to long-term sewer installation contracts having a fixed price per lineal foot of work done, notwithstanding that 10% of the amounts covered by the interim certificates were required to be held back until the time that the project was certified to have been completed. "Parliament has extended somewhat the ordinary concept of 'income' in relation to a business in which property is sold or services rendered and ... every amount to be received in respect of property sold or services rendered in the course of the business in the year shall be included notwithstanding that the amount is not to be received until a subsequent year ..."

Words and Phrases

MNR v. Burns, 58 DTC 1028 (Ex Ct), briefly aff'd 59 DTC 1328 (SCC)

The taxpayer, when it sold cottages it had constructed, usually accepted second mortgages from the purchasers which it would subsequently sell at a substantial discount from their face amount. In finding that s. 85B(1)(b) of the pre-1972 Act required the principal of the second mortgages to be included in the computation of the taxpayer's income at the time of the sale, Cameron J. noted that because the second mortgages were expressed in terms of money, it was that amount which was to be included in income in light of the definition of "amount" in s. 139 of the pre-1972 Act.

See Also

Lockwood Financial Ltd. v. The Queen, 2020 TCC 128

shares received on a deferred basis from a successor of a client were fee income in the year of entitlement to receive

The taxpayer (Lockwood), which was in the business of brokering the financing of junior resource corporations and other reporting issuers, helped broker a farm-in agreement in 2010 between its client Lion Energy Corp. (LEO) and Africa Oil Corp. (AOI), under which LEO received rights to an interest in petroleum blocks located in Kenya and Somalia in return for undertaking expenditures of at least $26,208,000 to develop the properties. For its services, Lockwood received an up-front payment of cash and shares, and also was entitled to receive a further payment (the “second portion of the finder’s fee”) in the form of 833,333 shares of LEO (which the payment agreement stated had a “deemed value of $0.30 per share,” or $250,000 in total) when LEO met the targeted expenditure of $26,208,000. However, in June 2011, LEO was taken over by AOI under a plan of arrangement. Lockwood brought an action based on it being entitled to receive 166,666 common shares of AOI (based on the exchange ratio under the plan of arrangement), and in June 2012, it was agreed that Lockwood would receive 95,000 common shares of AOI (which had a total value of $744,800 at that time) in full satisfaction of its claim. Lockwood disposed of these shares during the balance of the same (2012) taxation year for total proceeds of disposition of $821,828.

Lockwood submitted that the second portion of the finder’s fee should have been recognized by it in its 2010 rather than 2012 in the amount of $250,000 and that the excess of the proceeds received by it in 2012 over this amount was a capital gain. St-Hilaire J instead found that:

  • The second portion of the finder’s fee did not become receivable, and was not to be recognized as income, until 2010 (in applying the test adopted “in Maple Leaf Mills to the circumstances of this case, it must be determined if and when Lockwood 1) had a right to receive compensation from LEO, and 2) had a binding agreement fixing the amount to be received from LEO” (para. 45) and “its right to receive this compensation cannot be said to have been ‘absolute and under no restriction’” in 2010 (para. 53).)
  • Had it been received, “the payment of the 833,333 LEO shares would have been a payment to Lockwood for services rendered [and] hence … business income” (para. 64).
  • “[S]ince the 95,000 AOI shares replaced the 833,333 LEO shares, the AOI shares valued at $744,800 were received for services rendered. Hence, the amount of $744,800 is taxable as business income in Lockwood’s taxation year ending October 31, 2012” (para. 65).
  • The $744,800 amount recognized as the consideration for Lockwood’s services “thus becomes the adjusted cost base of the AOI shares received in 2012. That is the amount that the taxpayer gave up to acquire the shares” (para. 66).
  • Thus, the excess of the proceeds for the AOI shares received in excess of that ACB was a capital gain (para. 66).
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base value of shares included in fee income established their ACB 133

Supreme Steel Ltd. v. The Queen, 96 DTC 1430, [1996] 3 CTC 2152 (TCC)

Progress billings which the taxpayer rendered in its current taxation year for its work as a subcontractor were includable in its income in that year because the contract with the contractor established liability when the billings were approved by the contractor, which had occurred before the year end.

Outboard Marine Corp. of Canada Ltd. v. MNR, 90 DTC 1350, [1990] 1 CTC 2444 (TCC)

Duty drawbacks in respect of goods exported by the taxpayer from Canada which it had not yet applied for by the end of the taxation years in question were not receivable by it for purposes of s. 12(1)(b) because the amount of the drawbacks to be granted by the Minister pursuant to the Customs Act was within his discretion. Accordingly, the taxpayer did not have an absolute and unconditional right to receive the duty drawbacks at the end of those taxation years.

Laurentide Rendering Inc. v. The Queen, 88 DTC 6331, [1988] 2 CTC 200 (FCA)

The Minister of Public Works expropriated the taxpayer's property in 1969, but an agreement fixing the expropriation compensation was not concluded until 1975. For the purpose of the coming into force provision for s. 44(2), an amount did not "become receivable" (following Benaby Realties) until 1975.

Burrard Yarrows Corp. v. The Queen, 86 DTC 6459, [1986] 2 CTC 313 (FCTD), aff'd sub nomine Versatile Pacific Shipyards Inc. v. The Queen, 88 DTC 6352 (FCA)

The taxpayer, which was a corporation engaged in the construction of ships, agreed that title to all materials and finished parts would vest in the purchaser as they were paid for by progress payments. It was held that the work-in-progress of the taxpayer was not "held for sale" for the purposes of paragraph 20(1)(gg) because property in the goods already had passed.

Administrative Policy

20 March 2013 Internal T.I. 2012-0463181I7 F - Revenu des entrepreneurs

completion method unavailable for communication and electricity structure installations

CRA stated:

[C]onstruction and installation of communication and electricity structures are not covered by the completion method since they are not structures similar to a building, road, dam or a bridge. Contracts for the construction and installation of communication and electricity structures are thus precluded from using the method described in paragraph 12 of Interpretation Bulletin IT-92R2.

23 March 2011 Internal T.I. 2010-0389081I7 F - Disposition of a resource property

full undiscounted amount of future cash consideration to be included as an amount receivable

The Vendor sold a percentage interest in mineral claims for consideration including deferred cash payments to be paid over a four-year period. The Directorate noted that the full amount of the deferred cash payments (rather than discounted amounts) should be included in the Vendor’s proceeds of disposition under F in the definition of CCDE in s. 66.2(5), stating:

[T]he expression "became receivable" should have the same meaning as for the purposes of paragraph 12(1)(b).

Thus, for the purposes of paragraph 12(1)(b), we are of the view that to be able to say that the proceeds of disposition have become receivable, the vendor must have an absolute right, though not necessarily immediate, to the consideration and, secondly, that the proceeds of disposition are determined or determinable. (See inter alia The Queen v. Huang and Danczkay Ltd., 2000 DTC 6549 (FCA); The Queen v. Capital, General Insurance Company, 98 DTC 6215, (FCA); West Kootenay Power and Light Company Limited v. The Queen, 92 DTC 6023 (FCA); Maple Leaf Mills v. MNR, 76 DTC 6182 (SCC); MNR v. Benaby Realties Ltd., 67 DTC 5275 (SCC); and MNR v. John Colford Contracting Company Limited, 60 DTC 1131 (Exch. Ct.).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - cumulative Canadian development expense - Element F proceeds from mineral claims sale included undiscounted deferred cash proceeds, but might exclude share consideration until issued; purchaser’s CEE obligation excluded 390
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition - Paragraph (a) proceeds included full (undiscounted) deferred cash proceeds, but might exclude share consideration (with volatile market price) until issued 175
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) deferred share consideration potentially not recognized until issuance 103

25 August 1994 External T.I. 9413085 - RECOGNITION OF INCOME FROM SERVICES

Before stating that the taxpayer was only required to recognize income from the performance of services when it was possible to render the account rather than at the earlier time of completion of the services, RC stated:

"A right to receive an amount exists when the taxpayer has an absolute and unconditional right, though not necessarily immediate, to receive the amount. An absolute and unconditional right exist when all suspensive conditions of a contract are met. A suspensive condition is an event which suspends the realization of the contract until such a condition is fulfilled."

1994 A.P.F.F. Round Table, Q. 25

"If a conditional sale of property to a client is not included in computing income under s. 9(1), s. 12(1)(b) could be invoked on the basis that it represents a situation where a vendor has an absolute but not necessarily immediate right to be paid".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 16

20 August 1992 Internal T.I. 5-921716

Where there is a construction contract, its terms will establish when the contractor would have a legal right to receive amounts under the contract and, therefore, when such amounts became receivable. When the contract required approval as a condition precedent, the amount will only become receivable when specific approval was given.

22 August 1991 T.I. (Tax Window, No. 8, p. 11, ¶1407)

A fee payable to a committee for an incompetent is taxable in the hands of the committee as accrued even if a court has the discretion to make adjustments to the fee upon reviewing the committee's report.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base 34

21 August 1991 T.I. (Tax Window, No. 8, p. 21, ¶1402)

The 2% retroactive fee adjustment payable to Ontario doctors under OHIP should be included in their income on the date in May 1991 when the Ontario government announced that it would be paid.

24 May 1991 T.I. (Tax Window, No. 3, p. 19, ¶1235)

RC may require amounts receivable by a partnership under a prescribed revenue guarantee to be included in income before the payment date if there is an undue delay in payment by the film distributor to the partnership or by the users to the distributor. Generally, an undue delay is a delay which is longer than what is normal for the industry.

IT-479R, "Transactions in Securities", para. 28-32

Where the writer of a put or call option treats gains or losses on income account, the premiums received will not be income until the option is exercised or expires.

IT-170R "Sale of Property - When Included in Income Computation," August 25, 1980

5. The sale price of any property sold is brought into account for income tax purposes when the vendor has an absolute but not necessarily immediate right to be paid. As long as a "condition precedent" remains unsatisfied, a vendor does not have an absolute right to be paid.…

7. ...Where the date of exchange is not expressly agreed between the parties, the time that the attributes of ownership pass from the vendor to the purchaser is presumed to be the date of entitlement.…

12. A shareholder who deposits a share pursuant to a "take-over bid"...is entitled to the sale price on the earlier of

(a) the date that the offerer takes up the share, and

(b) the date upon which all conditions of the offer have been satisfied or waived.


Tetreault, "Canadian Tax Aspects of Asset Securitization", 1992 Conference Report, pp.23:21-23:25.

Paragraph 12(1)(c) - Interest



S. 12(1)(c) provides that, subject to subsection 12 (3) (respecting accrual basis taxation for a corporation, partnership, units trust or any trust of which one of these entities is a beneficiary) and subsection 12 (4.1) (respecting impaired debt obligations), any amount received or (depending on the method regularly followed by the taxpayer) receivable by the taxpayer in a year as, on account of or in lieu of payment of, interest will be included in the taxpayer's income for the year (except to the extent already included in a previous year).

Definition of interest

In order for an amount to qualify as "interest," it must represent compensation for the use of another person's money (Farm Security, Shell at para. 30, Mackinnon), and its amount must be referable to a principal sum (Farm Security, Balaji, Sherway). Although this second requirement may not be satisfied with respect to the entitlement of the holder of a debt instrument to receive a percentage of the adjusted revenues (Balaji, Yonge-Eglinton) or cash flow (Mutual Life) of the debtor, this requirement has been found to be satisfied where a bondholder was entitled to receive additional participating "interest" calculated as a percentage of the operation surplus of the debtor where such amounts were only payable so long as the bond principal was outstanding and where the purpose of the participation was to "top up" the return of the bondholder to a normal rate of interest return on the bond (Sherway).

Consistently with the above principles, an agreement of the holder of an option for the acquisition of lands, to pay an additional amount, calculated at a rate of 9% per annum, on its exercise of the an option based on the period of time that its exercise of the option had been extended beyond the original expiry date, was found not to give rise to interest income (Salt).

Daily accrual of interest

It also has been stated that an essential characteristic of interest is its day-to-day accrual (Barfried). It is unclear whether this establishes a third requirement which must be satisfied in order for amounts to qualify as interest, or whether it reflects the proposition that once an amount has been found to be interest, it will be considered to have accrued for the benefit of the holders of the related debt on a daily pro rata basis over the period of their holding of the debt. In Sherway, the Federal Court of Appeal accepted that there was a requirement that interest accrue on a day-to-day basis - but then found that participating interest satisfied this requirement because once the participating amount was determined, it was capable of being allocated on a day-to-day basis. In Perini Estate, the Federal Court of Appeal found that the requirement that the purported interest income of the taxpayer have accrued on a "principal amount" (namely, unpaid purchase price owing to the taxpayer) was satisfied, even though the amount of the unpaid purchase price was not determined (through an earn-out formula) until a number of years subsequent to the closing date from which the interest income purportedly accrued: the agreement of the parties that the finally determined unpaid purchase price would be treated as owing as of the closing date was sufficient. The jurisprudence on pre-judgment interest discussed below under "Awards and pre-judgment interest" also is consistent with the proposition that interest can arise on an as-yet unascertained amount.

As there does not appear to be a requirement that interest, in order to qualify as such, must be capable of being calculated at the end of each day during the term of the debt, the ostensible requirement for interest to accrue on a day-to-day basis may not have not much substantive significance.


In Willingale, where the House of Lords found that a bank which purchased debt obligations at discounts, was permitted to recognize the discounts as income only when realized rather than as they accrued, two of the Law Lords indicated that "a discount...is different from interest: it is not earned nor does it accrue from day to day." This finding appears to be at odds with some Canadian authorities which have indicated that discounts are interest (Confederation Life, Gilmour, see also United States v. Midland-Ross Corp. (1965), 381 US 54) and have indicated that discounts accrue on a day-by-day basis (Barfried). The statements in the Willingale case that discounts did not accrue from day to day may have been influenced by the consideration that the taxpayer bank could, and sometimes did, sell the debt obligations before maturity. Accordingly, it was impossible to determine at the time of purchase how much of the discounts would accrue for its benefit over the period of its holding of the obligations.

The proposition that discounts are interest likely will not hold where the debt instrument in question bears interest coupons at a normal or above-normal interest rate and the discounts are intended to compensate the holder for capital risk (see Lloyd Estate, Lomax v. Peter Dixon, Cohen v. MNR, 57 DTC 1183 (Ex Ct)). Conversely, the discounts on non-interest-bearing government treasury bills (which have no realistic capital risk) are interest (Satinder, Goulet, see also Ménard, and Thomas Nelson).

Cash or receivable method

S. 12(1)(c) provides that a taxpayer has the choice of recognizing interest income on a received basis (the cash method) or on a receivable basis, provided that the method applied has been regularly followed by the taxpayer in computing the taxpayer's income. However, this is somewhat misleading, as for taxation years commencing after 1982, a corporation, partnership, units trust or any trust of which one of these entities is a beneficiary is required by s. 12(3) to recognize interest income annually on an accrual basis; and under a somewhat more complicated regime applicable to individuals and other trusts under s. 12(4), they are required (to speak in approximate terms) to recognize accrued interest income no less frequently than on each anniversary of the date of issue of the obligation in question.

Valuation of "amount" of interest

It is the "amount" of interest in question which is included in the taxpayer's income under s. 12(1)(c). Where the interest is paid in a "right or thing" rather than in money, the definition of "amount' in s. 248(1) provides (subject to certain exceptions) that the "amount" of the interest is to be determined as "the value in terms of money of the right or thing."

Where accrued but unpaid interest owing by a corporation is "paid" by issuing preference shares which have a par value equal to the amount owing but which are worthless, the taxpayer will not be considered to have received the interest (see Praxair).

Allocation of payments between principal and interest

In common law provinces, whether a payment under a debt will be regarded as a payment of principal or interest will be determined by the terms of the agreement governing the debt or other agreement of the debtor and creditor. Where there is no such agreement, the debtor may direct as it pleases whether a payment made by it will be allocated to repayment of principal or to payment of interest; and in the absence of such appropriation by the debtor, the creditor may apply the payment to principal or interest as it sees fit (Fleishman, Boersen). In the absence of any such agreement or allocation, a payment is applied first to interest (Greenington).

In Quebec, where interest on a debt is in arrears and there is no agreement between the debtor and creditor as to how a payment by the debtor is to be applied, such payment will be applied prima facie to interest (Alepin).

Sales before interest due date

Prior to the enactment of s. 20(14), the sale of a debt instrument on which there was accrued but unpaid interest would not result in the receipt of interest by the vendor (Wigmore v. Thomas Summerson, Immobiliare). Somewhat similarly, the sale of an interest coupon at a time when it is not yet due may not give rise to the receipt of interest (Paget v. CIR). Conversely, in the absence of s. 20(14), the purchase of a debt instrument would result in the full amount of interest thereafter coming due on the instrument being included in the purchaser's income, notwithstanding that a portion of such interest may have accrued in the hands of the vendor prior to the time of the purchase (Schaffer v. Cattermole).

Payments in "lieu of payment" of interest

However, s. 12(1)(c) also provides for the inclusion in income of amounts received or receivable "in lieu of payment of...interest." In the context of tax avoidance transactions in which interest coupons would not be subject to Canadian tax when they came due, it has been found that the sale of interest coupons to RRSPs (Hall) or the deemed disposition of debt obligations (including interest coupons which had not yet come due) on a departure from Canada (Holzhey), were included in income at the time of disposition as being amounts received in lieu of the payment of interest. The latter case applied the Transocean principle that an amount is received in lieu of the payment of X if it represents a reasonable substitute for the payment of X.

This approach to the interpretation of s. 12(1)(c) may be objectionable on the basis that, in a non-tax avoidance context, it could result in double taxation of the same amount of interest (albeit, in the hands of two different Canadian taxpayers): once, upon disposition; and a second time, on the due date. This approach also may be inconsistent with General Motors Acceptance, where Rip TCJ as he then was indicated that an amount received by a purchaser of debt obligations from a third party rather than from the borrower was not interest.

Awards and pre-judgment interest

Where a legal entitlement to compensation arises to a taxpayer, and the taxpayer subsequently receives a judgment or other award which confirms such entitlement and quantifies its amount together with an award of interest on the amount of the entitlement in respect of the passage of time between the time at which the entitlement arose and the date of the award, such interest award generally will constitute interest for purposes of s. 12(1)(c) and be included in the taxpayer's income as interest income in the year the award is given and paid. This generally will be the case even though the amount of the award was not ascertainable until the year of the award, so that until then the principal amount owing to the taxpayer and the amount of interest accruing in each year could not be quantified (Miller, Elliott, Shaw, Mackinnon, Montgomergy, per contra Ahmad).

Where the award is in the discretion of the awarding agency, so that the taxpayer had no entitlement to be paid any amount until the time of the award, there likely will be no recognition of interest by the taxpayer (Huston, see also McCullagh Estate).


Newmont Canada Corporation v. Canada, 2012 DTC 5138 [at 7292], 2012 FCA 214

allocation of all of debt settlement payment to principal rather than interest grounded a full bad debt claim for the "unpaid" interest

The taxpayer agreed to settle a loan owing to it of over $8 million plus accrued but unpaid interest through the payment to it by the debtor of $1 million. The settlement agreement provided that the $1 million repayment proceeds were to be "applied on account of the principal amount of the loan." This was enough to make out a prima facie case that the taxpayer did not receive payment of any of the unpaid interest. As the Minister had not provided evidence to contest this case, the taxpayer was entitled to a bad debt deduction in respect of the unpaid interest.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus testimony sufficient to "demolish" assumptions 159
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss loan made as investment in mining business 170
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(i) interest was bad as settlement proceeds not allocated to it 222

Bastien Estate v. Canada, 2011 DTC 5118 [at 6014], 2011 SCC 38, [2011] 2 S.C.R. 710

In the course of concurring reasons provided in finding that a interest income on a deposit with an on-reserve credit union represented property of the taxpayer (a status Indian) that was situated on the reserve, Deschamps J. stated (at para. 89):

...it would be pointless to try to determine the location at which the interest accrued. The accrual of interest results not from an activity, but solely the passage of time.

Goulet v. The Queen, 2009 DTC 1875, 2009 TCC 127 (Informal Procedure), aff'd 2011 DTC 5138 [at 6120], 2011 FCA 164

discounts not compensation for risk
aff'd on other grounds 2011 DTC 5138 [at 6120], 2011 FCA 164

In finding that the difference between the purchase price of notes and of commercial paper acquired by the taxpayer in the secondary market and their redemption price was interest to the taxpayer, Bédard, J. rejected the taxpayer's submission (at para. 6) that s. 12(9) of the Act and Regulation 7000(2) applied only to taxpayers who held prescribed debt obligations that were acquired at the time of their issue. He then went on to find that even in the absence of the above provisions, the discounts received by the taxpayer would have been interest income to him on general principles given that the taxpayer did not establish that the rate of return for these obligations reflected a risk premium.

Alepin v. The Queen, 79 DTC 5259, [1979] CTC 360 (FCTD)

Civil Code required repayment to be applied first to interest

Notwithstanding the taxpayer's allegations to the contrary, there had never been an agreement (verbal or otherwise) between the taxpayer and a debtor that the whole of a $1 million payment made to the taxpayer was to be treated by it as a payment on account of capital. Accordingly, the Minister was correct in applying provisions of the Civil Code which required that where interest on a debt was in arrears, any payment prima facie had to be applied first to interest, then to capital.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 16 - Subsection 16(1) payments applied first to interest 95

The Queen v. Elliott, 96 DTC 6189 (FCTD)

expropriation payment included interest

Twelve years after Ontario Hydro expropriated some farm lands of the taxpayer, it reached an agreement with the taxpayer to pay him $44,425 of compensation plus interest (computed at 18½%) on the compensation amount over the 12-year period. Wetston J. found that because the interest amount was calculated as a discrete sum, after an agreement was reached as to the total compensation to be paid to the taxpayer, it was attributable to a delay in the payment of that capital sum and, therefore, was taxable as interest income.

Munich Reinsurance Co. v. The Queen, 96 DTC 6185, [1996] 2 CTC 5 (FCTD)

Interest earned by the taxpayer (a German corporation carrying on a reinsurance business throughout the world, including through a branch in Canada) on income tax instalments which it had overpaid, were included in its income under s. 12(1)(c) and, therefore, were not subject to tax under Part XIII of the Act.

Bellingham v. The Queen, 96 DTC 6075, [1996] 1 CTC 187 (FCA)

An award of "additional interest" received by taxpayer pursuant to s. 66(4) of the Expropriation Act (Alberta) (a provision which required the payment of such amount in circumstances where an expropriating authority offered less than 80% of the amount ultimately awarded and the Expropriation Board was of the opinion that such lower figure was due to the fault of the expropriating authority) did not, by its nature, constitute compensation for the lands that had been taken, nor compensation for the loss of use of money. Instead, its true nature was in the nature of a punitive damage award intended to discourage token or unrealistic payments from being tendered. Accordingly, the payment was simply a windfall and, therefore, not income under s. 3(a).

Satinder v. The Queen, 95 DTC 5340 (FCA)

T-Bill discounts were interest

The difference between the $152,078 purchase price for a Government of Canada Treasury Bill, which the taxpayer acquired on May 2, 1989, and its face value of $170,000, which the taxpayer received on the maturity of the treasury bill on April 27, 1990 was correctly treated by Revenue Canada as interest income for the taxpayer's 1990 taxation year, rather than as a payment of principal to which s. 39(4) applied. Stone, JA noted (at p. 5343) that "it is well established that, as a general rule, compensation for the use of money represents interest," that there was "no suggestion of any accretion to capital between the date the bill was acquired and the date it was redeemed," and that it was apparent that a holder of a treasury bill is paid a blend of principal and interest upon its redemption.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(4) 64

The Queen v. Shaw, 93 DTC 5121, [1993] 1 CTC 221 (C.A.)

The farm lands of the taxpayer were expropriated pursuant to the Expropriation Act (Alberta) in 1977. Following the settlement in 1986 of an action against the Province of Alberta, the taxpayer received the sum of $1,020,368 which was calculated as a replacement of interest income which the plaintiff would have earned if he had been paid the full value of his land at the time of the expropriation.

Because the character of this sum under the Expropriation Act was compensation for the government's failure to pay promptly the balance of the value of the land that had been taken, rather than compensation for the expropriation of the land, that sum also constituted interest for purposes of the Act rather than proceeds of disposition of the land. With respect to the finding of the Trial Judge that because s. 44(2)(a) deemed the taxpayer to have disposed of the land in 1986, therefore there was no interest that had accrued to the taxpayer prior to that date, the Court found that s. 44(2)(a) was merely a timing provision that did not recharacterize the nature of the sum received.

Piché v. MNR, 93 DTC 5295 (FCA)

interest received upon the receipt of cheque

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 received the cheque for the purchase price (including the interest) and accepted that cheque as payment (as evidenced by his deposit of the cheque to a branch of the Bank of Montreal in Quebec), rather than early in 1991 when the amount was credited by the bank to his bank account at his account at the same bank at a different branch.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt payment when cheque accepted as payment 87

Praxair Canada Inc. v. The Queen, 93 DTC 5100, [1993] 1 CTC 130 (FCTD)

pref shares received in exchange for debentures had an FMV less than their par value, so that no receipt of unpaid debenture interest

As part of the restructuring of a company in financial difficulty, the taxpayer received Class C preference shares of the company having a par value of approximately $28.2 million in exchange for surrendering unsecured subordinated debentures with a principal amount of approximately $25.1 million and accrued but unpaid interest thereon of approximately $3.1 million. At the time of the exchange, the taxpayer had no entitlement to demand payment of the interest, because it had been agreed with the more senior bank lenders that payment of such debenture interest would be deferred for so long as the company failed to satisfy various financial tests governing the debentures.

The taxpayer, in the light of expert valuation evidence, was able to demolish the implicit assumption of the Minister that the Class C preference shares had a value equal to their par value, with the result that the taxpayer was not required to include any amount in income under s. 12(1)(c) in respect of the unpaid interest on the subordinated debentures.

Miller v. The Queen, 85 DTC 5354, [1985] 2 CTC 139 (FCTD)

Following binding arbitration, the appellant was awarded a salary increase retroactive to the beginning of the preceding year together with "interest" calculated at a specified rate on that "principal" amount. It was held that the "interest" was in fact such, since there is no requirement that the principal amount in relation to which the interest is paid be ascertainable at the beginning of the period in respect of which the interest is calculated.

Freeway Properties Inc. v The Queen, 85 DTC 5183, [1985] CTC 222, [1985] 1 CTC 222 (FCTD)

interest required to be prepaid was receivable

A mortgage with a term of July 1979 to December 31, 1984 provided that the present value of the interest which would have accrued over the balance of the term of the mortgage was due and payable in three equal instalments ending on March 31, 1980. Since the taxpayer mortgagee had the right to receive in 1980 the whole of the interest, that interest was "receivable" by it in the year, and was included in its 1980 income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Income of the Corporation for the Year From an Active Business interest on vendor-take-back mortgage was active 59

Salt v. The Queen, 84 DTC 6395, [1984] CTC 414 (FCTD)

An option agreement, in addition to granting the Grantee the option to acquire lands for a price of $240,000, provided that:

"[T]he Grantee agrees to pay to the Grantor $1,800,000 per month from May 18, 1973. This sum being 9% on $240,000. The said payments are to accumulate and be paid upon the exercising or expiry of the Option."

It was held that the monthly amounts of $1,800 were not interest to the Grantor "but merely the means of measurement of the increment to the purchase price payable to the plaintiff [Grantor] consequent upon the extension of the time to exercise the option or the delay in exercising that option."

The Queen v. Terra Mining & Exploration Ltd. (N.P.L.), 84 DTC 6185, [1984] CTC 176 (FCTD)

It was stated, obiter, that s."12(1)(c) require[s] accounting [for interest] in conformity with ordinary commercial practices and/or generally accepted accounting principles". It was further suggested that such practices or principles may permit a "hybrid system" wherein some interest income is accounted for by the taxpayer on an accrual basis, and some on a cash basis.

Perini Estate v. The Queen, 82 DTC 6080, [1982] CTC 74 (FCA)

parties were entitled to treat conditional interest, when paid, as having retrospective absolute effect

The deceased taxpayer sold a company in 1968 in consideration for an initial payment of $660,000 and three additional annual payments based on the audited net profits of the company for the three subsequent years, but with such additional payments not to exceed $1,200,000. The share purchase agreement provided that "interest", calculated at a rate of 7% per annum from the closing date to the date of payment, would be added to the amounts of the subsequent annual additional payments.

Taxpayer's counsel argued that the "interest" amounts were payments of capital as they did not accrue from day to day on an existing principal amount: the principal amount on which the "interest" was calculated did not come into existence until it had been determined on the basis of subsequent audited financial statements. In rejecting this submission, Le Dain J noted (at p. 6085) that it was open to the parties to treat the subsequent determination of the amounts owing as having retrospective effect to the closing date of the purchase, and that this is what they had done by providing for the accrual of 'interest" on the additional amounts from the closing date. After referring to Huston & Whitehead v. MNR [1962] Ex CR 69, where an award in 1958 of compensation out of the War Claims Fund for a loss suffered in 1945 plus "interest" was found not to contain any element of interest because there was no entitlement to compensation until the award was given, Le Dain J stated (at p. 6085):

I think it is the existence on the closing date of a conditional obligation or contingent liability to pay the balance of price which the parties were entitled to treat as having become absolute with retroactive effect, for purposes of interest, that distinguishes the present case from Huston.

Accordingly, the "interest" amounts also were interest income for purposes of the Act.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 186

The Queen v. Greenington Group Ltd., 79 DTC 5026, [1979] CTC 31 (FCTD)

The taxpayer made a second mortgage loan to a real esate developer ("Clearstream"). After Clearstream defaulted, the taxpayer arranged for an affiliated company ("Ontra-Desar") to purchase the mortgaged property, doing so (without the knowledge of Clearstream) as nominee and agent for the taxpayer. The consideration paid by Ontra-Desar was stated to include the discharge by it of the second mortgage liability of Clearstream to the taxpayer including the arrears interest. (The taxpayer did not want Clearstream to realize that it was the true purchaser, so that the second mortgage would automatically be extinguished as a result of the purchase.)

In finding that the taxpayer had received the arrears interest (and, therefore, was taxable on that amount under s. 6(1)(b) of the pre-1972 Act), Walsh J stated (at p. 5037) that the taxpayer "actually received the interest due to it on its loan as a result of paying less in cash to the vendor [through its nominee] to the same extent when the purchase price was paid." Walsh J further stated that even if the value of the lands (net of the first mortgage liability) had been insufficient to pay the amounts (including interest) owing to the appellant, the value of the lands acquired (net of the assumed first mortgage) would be attributed first to interest, with any remaining balance attributed to capital, so that any value shortfall would not have the effect of reducing the amount of interest considered to have been received by the taxpayer under s. 6(1)(b) of the pre-1972 Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate no profit-making intention at time of acquistion of property on debtor default 138

The Queen v. Quinn, 73 DTC 5215, [1973] CTC 258 (FCTD)

Under a contract with the Canadian Scholarship Trust Fund it was agreed that interest on funds deposited by the taxpayer would be transferred to the Trustee on the maturity of the plan, to be applied to the education costs of the taxpayer's son if certain conditions were met, or otherwise for the benefit of other beneficiaries. Since the taxpayer would not receive the interest regardless of the circumstances under which the plan matured or was terminated, accrued interest was not includible in the taxpayer's income.

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

sale of matured interest coupons gave rise to interest receipt or amount in lieu

An individual taxpayer, who in two successive years clipped and sold overdue coupons in the amount of $10,000 on his Canada bonds to the trustee for five RRSPs (the beneficairies of which wre unrelated) for a sale price of $9,000, was held to have (1) received the sale proceeds as interest and (2) as a payment "in lieu of payment of... interest."

With respect to the first ground, Sheppard DJ stated (at p. 6335, DTC):

Interest includes compensation for the use of money....The Appellant's right under the bonds was to receive interest as compensation for the use of his money and that right could be realized by surrendering the coupons to any agent of Canada or equally by selling to the trust company by delivering the matured coupons; in either event, the proceeds in the Appellant's hands represent the sum received by him as compensation for the use of his money which he had lent to Canada.

With respect to the second ground "the words 'in lieu of' mean 'instead of' ... and therefore the sums of $9,000 have been received by the appellant 'instead of' the sums to be received from an agent of Canada on presenting the coupons."

Words and Phrases
in lieu of
Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt interest coupons required to be presented 79

Lloyd Estate v. MNR, 63 DTC 1349 (Ex Ct), briefly aff'd 65 DTC 5031 (SCC)

bonuses or discounts not interest where market interest coupons

Before finding that bonuses or discounts received by the taxpayer (a dentist), on on a large portfolio of risky first mortgages acquired by him as his principal source of income and held by him until maturity, constituted business profits when received, Noël J. stated (p. 1354):

"With regard to respondent's contention that appellant's bonuses or discounts here should be regarded as interest and taxable therefore under s. 6(b) of the [pre-1972] Act, I cannot agree. Indeed, it is now settled (cf. Lomax v. Peter Dickson...) that where a loan is made at or above a reasonable commercial rate of interest as is applicable to a reasonable sound security, there is no presumption that a 'discount' at which the loan is made or a premium at which it is payable is in the nature of interest.

Now the interest rate in the present instance...is far above the conventional rate to a point where one can say in determining the true nature of these discounts by looking at all the relevant circumstances such as the term of the loan, the rate of interest, the nature of the capital risk, the extent to which, if at all, the parties expressly took, or may reasonably be supposed to have taken the capital risk into account in fixing the terms of the mortgage, that such discounts are not in the nature of interest...."

Huston v. MNR, 61 DTC 1233, [1961] CTC 414 (Ex.Ct.)

An award which the taxpayers received in 1958 from the War Claims Commissioner as compensation for the confiscation of their Czechoslovakian factory during World War II included notional interest of 3% per annum for the period from January 1, 1946 to the date of the award. The notional interest was not "received as interest" within the meaning of s. 12(1)(c). "[T]here was neither interest accruing in fact on the 'principal' amount during the material period nor any right to the 'principal' amount vested in the taxpayer during that period." The payments here simply were grants to individuals, and payments "take their nature not from the motives for making them or from what they are called, but from what in substance they are."

McCullagh Estate v. MNR, 59 DTC 1159, [1959] CTC 308 (Ex Ct)

S.20 of the Succession Duty Act (Ontario) provided that where succession duty was paid before the due date, the Treasurer of Ontario was authorized to "allow interest upon the amount so paid at a rate not exceeding three per cent per annum from the time of payment until the time so provided for payment." A reduction in succession duty pursuant to this provision was not interest income for purposes of s. 6(1)(b) of the pre-1972 Act, even if the purpose of s. 20 was to compensate for the loss of the opportunity to use money between the payment date and the due date.

Thurlow, J. stated:

"I find it impossible to regard the allowance either as a payment for the use of money or as an amount earned or gained by the prepayment of the duty ... [I]t is allowable simply because the statute so states, without regard for the reasons which may have prompted the legislature to provide for it and regardless, as well, of the executors' purpose in making the payment. In my opinion, the allowance is, in fact and in law, nothing more nor less than a statutory reduction ... of the duty which otherwise would be payable."

The same conclusion would have obtained if the allowance was made by way of refund to the taxpayer, rather than by deduction from the duty.

See Also

Agence du revenu du Québec v. Bernardin, 2021 QCCA 625

interest that arose prior to a class action judgment becoming res judicata was non-taxable – interest arising thereafter was taxable even though judgment not yet quantified

An individual, by virtue of being part of a group of class action claimants, was awarded damages in 2004 of $1,200 for each of the eight winter seasons in which she had endured snowmobile noise. In 2010 she received damages pursuant to Article 1619 of the Quebec Civil Code of $8,400 (capital) and $6,148 (interest). Whether the interest was taxable under the Taxation Act turned on when her damages were considered to have become “liquidated.”

This liquidation date did not occur until October 1, 2009, being the later of the date on which the Attorney General of Quebec and the relevant Municipality had abandoned their appeals which had been launched in December 2004 - so that only the awarded interest that was referable to the period after that date was taxable to the individual, and even though the precise quantum of the amount payable to that individual was not established until the judgment of the Court Clerk issued on March 3, 2010. Gagné JCA stated (at paras. 41-43, 48-49, TaxInterpretations translation):

[O]ne cannot speak of interest in the strict sense unless the debt is both certain and liquidated. These two qualities arise at the time when the judgment becomes res judicata, that is, when it is not, and is no longer, subject to appeal. As long as the validity and/or the amount of the debt is the subject to debate on appeal, it cannot constitute a debt that is certain and liquidated or, in other words, a capital sum on which interest may accrue.

On the other hand, the debt does not have to be due and payable to bear interest. It is sufficient (and here I paraphrase Rand J. in … Farm Security) that there be a use or retention by one person of a sum of money belonging to or owed to another. This, in my view, is a debt that is certain and liquidated.

I conclude that interest and additional compensation become interest proper, and therefore taxable interest, at the time the judgment awarding it became res judicata. In most instances, this will be the time when the debt is due. But not here … .

Once the November 30, 2004 judgment became res judicata, there was a definite sum owing (a liquidated and certain debt) on which actual interest could accrue.

The fact that [the Quebec Attorney General] was unaware of the extent of the members' claims at the time is irrelevant. …[T]he determination of whether an amount received or receivable is interest income must be made from the perspective of the taxpayer.

Words and Phrases

Bernardin v. Agence du revenu du Québec, 2019 QCCQ 846, aff'd 2021 QCCA 625

interest that accrued prior to a class action judgment having become res judicata was non-taxable

The plaintiff was a member of a group of class action claimants who in 2004 received a judgement for $1,200 in damages for each of seven winter seasons in which they had suffered from snowmobile noise. In 2010, she and the others received an additional indemnity and interest pursuant to a judgment issued on November 9, 2009 under Article 1619 of the Quebec Civil Code of $8,400 (capital) and $6,148 (interest). Both the plaintiff and the ARQ were in agreement that whether such interest was income turned on whether (to apply the wording in IMP.87-1/R1) “the damages [were] liquidated under a judgment” in 2004 or in or about 2010.

In finding that the liquidation occurred in July 2009, so that the interest was not taxable, Coutlée, J.C.Q. stated (at paras. 29-30, TaxInterpretations translation):

The judgment rendered by the Court Clerk [on March 3, 2010] was only the final link in the implementation of the final judgment of November 30, 2004

However, the November 30, 2004 judgment attained the status of res judicata only on July 3, 2009, being the date on which the Attorney General of Quebec abandoned the appeal which had been launched on December 2004.

News Australia Holdings Pty Ltd v Commissioner of Taxation, [2017] FCA 645

interest was “derived” on an accrual basis on a loan where it was a business asset and there was no collection uncertainty

SRC was a wholly-owned subsidiary of an immediate subsidiary (News Limited) of the taxpayer. Income derived by SRC was attributed to the taxpayer. Interest income of US$66,023,141 accrued due in the 2010 income year of SRC on a loan owing to it by News Limited, but that interest, was not paid until the 2011 income year of SRC.

Pagone J accepted the contention of the Commissioner that SRC was to be assessed for the interest income which accrued in the 2010, based on the basis that under s. 6-5 of the Income Tax Assessment Act 1997 (Cth) such interest was “derived directly or indirectly from [a] source…during the income year.”

Pagone J stated (at paras. 6, 8, 11, 12 and 33):

… The inquiry into derivation is not into whether an entitlement to receive has arisen or whether an amount has been received, although both entitlement and receipt may be relevant in determining whether there has been derivation. The inquiry is, rather, into when an item of ordinary income can be said to have come home to the taxpayer in a realised or immediately realisable form… .

[I]n Carsden’s case [63 CLR 108]…Dixon J expressed the view that the receipts basis of accounting would alone truly reflect the income of a medical practice if “there [was] but little certainty about the payment of fees.”

The authorities establish that interest income may be derived when accrued and that the taxpayer’s business and income earning activities, and the place of interest income in that business or activities, are relevant considerations to whether interest has been derived, in the sense of having come home, when accrued or only when received. …

SRC[‘s]…assets during that period were essentially cash and receivables, intracompany debts and shares in its subsidiaries.

…[A]n accruals basis of accounting for the interest accruing to SRC provided the correct reflex of SRC’s true income and the applicant is to be assessed on SRC’s interest income which accrued in the 2010 year. That the interest income had been derived upon accrual, … is not denied by the fact that … “SRC made only 2 loan advances in 10 years, and occasionally provided other financial accommodation in other forms”. SRC’s undertaking was substantial and the derivation of interest income was significant and was a means by which it employed a fund of capital from which to derive income or profit. … SRC also accounted for its interest income on an accruals basis and used and relied upon its funds upon accrual. There was no suggestion on the evidence that payment of the accrued interest income from its parent was uncertain. … [T]he lending of money and the provision of financial accommodation for reward to its parent company was part of its business or income earning activities. It may be accepted, without deciding, that SRC did not carry on a business of investment or of lending money, but its income earning activities included the lending of money to, amongst others, its parent on commercial terms for reward and the interest income had come home to SRC in a realised or immediately realisable form upon its accrual.

Pike v. Revenue and Customs Commissioners, [2014] BTC 33, [2014] EWCA Civ 824

loan premium was interest

The taxpayer subscribed for loan stock of a family company at a price equal to its principal amount. Although the loan stock did not bear any amounts described as interest, a premium was payable on any redemption or repayment thereof "equal to 7.25% per annum of the Principal Amount to be repaid or redeemed, accruing on a daily basis." A few days later, he transferred the loan stock to a family trust. His (denied) claim for a loss on this transfer (arising from discounting the principal and premium payable on maturity using a 12.25% discount rate) turned on concluding that no amount on maturity would be "payable…by way of interest" (per s. 3(6) of Sched. 13 to the Finance Act 1996.)

Before concluding (at para. 19) that "the true nature of the payment was that it was interest," Rimer LJ quoted (at para. 18) with approval a statement of the Upper Tribunal that "interest" has "certain characteristics:"

First, it is calculated by reference to an underlying debt. Second, it is a payment made according to time, by way of compensation for the use of money. Third, the sum payable accrues from day to day or at other periodic intervals. Fourth, whilst the payment so accrues, it does not, in order for it to be interest, have to be paid at any intervals: it is possible for interest not to become payable until the principal becomes payable (see Willingale). Fifth, what the payment is called is not determinative; the question must always be one as to its true nature. Sixth, the fact that an interest payment may be aggregated with a payment of a different nature does not 'denature' the interest payment (Chevron Petroleum UK Ltd v. BP Petroleum Ltd [1981] STC 689, at 694, per Megarry V-C).

Words and Phrases

Pope & Ors v. R & C Commrs., [2012] UKUT 206 (Tax and Chancery Chamber)

The son of the taxpayers (Mr and Mrs Pope), who was the beneficiary of a life insurance policy which he had purchased on his own life, was abducted in Angola by rebels in 1998. His death was likely but never conclusively established. Mrs Pope, who had her son's power of attorney, negotiated with the life insurance provider. In 2002, the provider paid the £100,000 principal amount insured, plus an additional amount of £36,425.97. The policy provided for the accrual of interest on the insured amount, but with the rate of interest "being at the Society's absolute discretion."

The Upper Tribunal agreed with the first-tier tribunal's conclusion that the additional amount was an interest payment and not, as the taxpayers had contended, an ex gratia capital payment. The Tribunal cited Lord Wright in National Westminster Ltd. v. Riches (1945), 28 TC 159 (HL), who stated (at p. 189):

[T]he essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation.

The payment had clearly been made as compensation for the deprivation between 1998 and 2002 of the principal amount. The amount had been determined in accordance with the insurer's usual business practices, and was continually referred to as "interest" in correspondence with Mrs Pope.

The Upper Tribunal went on to find that the interest was not chargeable as income which the taxpayers had received or to which they were entitled because at the time of receipt all beneficial interests in the unadministered estate were held in suspense.

Holzhey v. The Queen, 2008 DTC 2607, 2007 TCC 247

deemed loan proceeds reasonable substitute for accrued interest thereon

The deemed disposition by the taxpayer, as a result of his ceasing to be a resident of Canada, of a loan made by him to a non-resident corporation on which there was accrued but unpaid interest resulted in him being thereby deemed to receive an amount "in lieu of" the payment of interest. In the Transocean case, amounts paid in respect of the anticipatory breach of a rental agreement were found to be a reasonable substitute for rent payable under the agreement; and similarly, here "the deemed proceeds were a reasonable substitute for the accrued interest". (para. 37)

Words and Phrases
in lieu of

Mackinnon v. The Queen, 2008 DTC 2052, 2007 TCC 658

As a result of the payment of the proceeds of the RRSP of the deceased spouse of the son of the taxpayer to the spouse's estate rather than to the taxpayer (who was the main beneficiary of the RRSP), the taxpayer received judgment against the estate for the amount of the estimated value of the RRSP at the time of the wrongful payment plus an amount stated to be interest (calculated over the seven-year period from the date of such payment to the date of judgment). In finding that the sum referred to as interest constituted interest income to the taxpayer under paragraph 12(1)(c), Angers J. stated (at para. 16) that the sum satisfied the statement in Re: Farm Security Act, [1947] S.C.R. 394 that "interest arises when there is amount due to, or belonging to, another person for the period for which the interest is calculated".

Boersen v. The Queen, 2007 DTC 1696, 2007 TCC 671 (Informal Procedure)

An action by the taxpayer for a total of $68,000 in interest and principal owing to him under a loan to his uncle and a debtor company was settled by the payment to him of $11,500. The settlement agreement was silent as to the allocation of the settlement payments as between principal and interest, and the payors did not make any allocation of the payments as between principal and interest (although a T5 reporting slip was issued to the taxpayer). Accordingly, the taxpayer was entitled to allocate all the amounts received to principal, which the taxpayer did, so that none of the amounts received were interest income to him.

Montgomery v. The Queen, 2007 DTC 898, 2007 TCC 317 (Informal Procedure)

Pre-judgment interest (and some post-judgment interest) included in an award made to the taxpayer as a wages adjustment pursuant to the Canadian Human Rights Act which prohibited the federal government from paying wages that discriminated on the basis of gender, constituted interest for purposes of s. 12(1)(c).

Ahmad v. The Queen, 2002 DTC 2065 (TCC)

Prejudgment interest received by the taxpayer as part of a damages award for tortious interference by a third party with his employment contract was found not to be interest because, until the time of judgment against the third party, there was no liquidated amount to which he was entitled and, therefore, no amount to which interest could be related.

R.A. Hewitt & Sons Ltd. v. The Queen, 2000 DTC 2441 (TCC)

Interest on a loan made by the taxpayer to a foreign affiliate was includable in its income at the 5% interest rate provided in the loan agreement notwithstanding that such interest was not received by the taxpayer.

General Motors Acceptance Corp. of Canada Ltd. v. The Queen, 2000 DTC 1844 (TCC)

The taxpayer purchased conditional sales contracts from Canadian General Motors franchise dealers and was reimbursed by General Motors of Canada Limited ("GMCL") under a "rate support program" for the amount by which the principal or face amount of the purchased contracts exceeded their discounted value. In later taxation years, the rate support program amounts were paid by GMCL directly to the dealers. The taxpayer brought the difference between the discounted amount and the face amount of the contracts into its income over the life of the contracts.

In rejecting a submission of the Crown that the rate support program amounts represented compensation to the taxpayer for lost interest, Rip TCJ. found that the taxpayer was not in a lender-borrower relationship with the retail customers of the dealer and (at p. 1855) "for an amount of money to constitute interest, the amount must be paid by the borrower of the money to a person who loaned money to the borrower".

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

payment applied by creditor to principal

Payments received by the taxpayer on a note owing by an arm's length debtor were found to be principal rather than interest on the basis of the doctrine that a debtor may direct his payment to be applied as it pleases, and that in the absence of any appropriation made by the debtor (as was the case here) the creditor may apply the money as he thinks fit.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt creditor may apply payment as it determines if debtor does not 97

Donovan v. The Queen, 94 DTC 1143, [1994] 1 CTC 2394 (TCC), aff'd 96 DTC 6085 (FCA)

imputed interest income under barter exchange would arise to extent that an interest-free loan to a corporation would have reduced the s. 15(1) benefit

A corporation took title to a Florida residence for which the taxpayer had exclusive use. Although there were large interest-free loans owing by the corporation to the shareholder (the taxpayer), Teskey J held that there was no connection between such loans and the original cost of the house, so that the benefit arising to the taxpayer under s. 15(1) should not be reduced having regard to the interest-free nature of the loans and the making of such a reduction in Youngman. Teskey J went on to state (obiter, at p. 1147) that, even if there had been a reduction in the s. 15(1) benefit, there would have been a matching interest income inclusion:

[T]he Federal Court of Appeal [in Youngman] did not have put to it nor did it consider the implications of barter.

Barter, on occasion, is used by some people to gain goods or services, the benefit of which is not declared as income in an attempt to avoid taxes. An example of this would be if I lend my arm’s length landlord $300,000 interest free and the landlord, in turn, does not charge me rent on the apartment which I occupy, which would normally have an annual rental of $20,000, the tax authorities lose tax on income of $20,000 from both my landlord and myself if the same is not declared. The $20,000 is taxable income in both hands.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) Youngman did no consider the implications of barter exchange 109

Gestion Guy Ménard Inc. v. MNR, 93 DTC 1058, [1993] 2 CTC 2793 (TCC)

sale one day prior to maturity

The taxpayer purchased significant quantities of treasury bills through its broker and sold them one day prior to maturity. In dismissing the taxpayer's appeal, Dussault, TCCJ. found that the amount received as the sale price represented compensation for interest earned that the purchaser would recover the following day upon payment at maturity and, therefore, could probably be described as received "in lieu of payment of interest"

Schaffer v. Cattermole, [1980] T.R. 331, 53 TC 499 (CA)

sale of bond with accrued interest did not generate interest receipt
principle applied in Immobiliare Canada

The purchase price of a government bond reflected interest that had accrued up to the date of the purchase. Nonetheless, when interest was paid on the bond, the full amount of the interest was included in the purchaser's income, rather than just the portion that accrued subsequent to the date of purchase.

Davies v. Premier Investment Co. Ltd.; Hewetson v. Carlyle (1945), 27 TC 27 (KBD)

A company issued at par £500,000 in notes which did not bear interest and which were repayable in six years time together with a premium of 30%. In the event of an early redemption of a note, the premium was the equivalent of 5% per annum.

The premium was "interest of money".

Lomax v. Peter Dixon & Son Ltd. (1943), 25 TC 353 (CA)

The Finnish subsidiary of the taxpayer arranged to repay shareholder advances of £319,600 by issuing notes with a face amount of £340,000 and bearing interest at 1% over the Bank of Finland discount rate. It was agreed that the notes would be repaid over a 20 year period and that a 20% premium would be payable on any annual redemption if the profits of the Finnish subsidiary in the year preceding the year of that redemption exceeded a specified level.

The discounts and premiums, when received, were realized on capital account. "Where a loan is made at or above such a reasonable commercial rate of interest as is applicable to a reasonably sound security, there is no presumption that a 'discount' at which the loan is made or a premium at which it is payable is in the nature of interest.... In deciding the true nature of the 'discount' or premium, in so far as it is not conclusively determined by the contract, the following matters together with any other relevant circumstances are important to be considered, viz., the term of the loan, the rate of interest expressly stipulated for, the nature of the capital risk, the extent to which, if at all, the parties expressly took or may reasonably be supposed to have taken the capital risk into account in fixing the terms of the contract.

CIR. v. Thomas Nelson & Sons, Ltd. (1938), 22 TC 176 (C.S. (1st Div'n))

The taxpayer lent money to its Indian subsidiary under an agreement which provided that interest was to be paid at 3% per annum (a "remarkably low rate for an unsecured loan") and that on repayment of the principal (which would occur in 10 years time, or earlier on the occurrence of certain specified events or on the election of the subsidiary to repay) a premium would be paid whose amount was based on 2% per annum for the first two years during the term of the loan, and 2 1/2% per annum thereafter.

Premiums, when received, were income from foreign possessions rather than payments of capital. "The premiums are part of the consideration given by the borrowers for the use of the capital lent to them, and part of 'the creditor's share of the profit which the borrower ... is presumed to make from the use of the money'." The effect of the premium was to give the lenders a return on their capital ranging between 5% and 5 1/2%.

Paget v. CIR (1937), 21 TC 677 (CA)

The taxpayer held US-dollar denominated bonds of the Yugoslavian government which defaulted (although it offered alternative payment arrangements, including in "blocked" dinars). Proceeds of sale realized by the taxpayer on the subsequent sale by him of interest coupons on the defaulted bonds were found not to constitute income from foreign securities out of the U.K., based on the proposition that "the proceeds of sale of a right to receive income in the future...are capital in the hands of the vendor" (per Lord Romer at pa. 699).

Wigmore v. Thomas Summerson and Sons Ltd. (1926), 9 TC 577 (Ch D)

The taxpayer, who had sold bonds with coupons attached but not yet due, had not received interest of money for purposes of Schedule D Case 111 Rule 1. Rowlatt, J. state (at p. 581):

The truth of the matter is that the seller does not receive "interest" and "interest" is the subject matter of the taxation. He receives the price of the expectancy of interest, and that is not the subject of taxation....

Administrative Policy

28 June 2017 External T.I. 2017-0705431E5 - funds held in settlement account

litigation settlement trust with class action beneficiaries required to pay tax and file T3 returns

Settlement funds received by a law firm from the defendant in a class action suit are held in a settlement trust, to be applied solely for compensating class members after approval of the terms of the settlement by final Court order. In the meantime, a T5 slip is issued annually to the “law firm in trust” respecting interest earned on these funds.

After finding that the trust was not exempt from tax on the interest income under s. 149(1)(w), it indicated indicated that the trustees of the trust were required to file T3 returns on the basis inter alia of s. 150(1.1), which requires the trust to file returns if tax is payable by it.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(w) court-supervised settlement fund for class action was not required by a law 186
Tax Topics - Income Tax Act - Section 150 - Subsection 150(1.1) - Paragraph 150(1.1)(b) - Subparagraph 150(1.1)(b)(i) class-action settlement fund was required to file T3 returns 188

22 January 2014 External T.I. 2014-0517121E5 - T5 Information Slip Reporting Requirements

3 requirements for "interest"

A credit union pays a member an incentive for holding an account balance, calculated as a percentage of the balance held in the account on certain predetermined anniversary dates. In finding that the incentive was interest which should be reported on a T5 information slip, CRA stated that to be interest, an amount

…must be calculated on a day-to-day accrual basis, …must be calculated on a principal sum…, and … must be compensation for the use of the principal sum… .

[T]he bonus/premium is determined based on a percentage, the deposit must be in place for a stipulated period of time, and there is a balance on which the payment is calculated. Therefore…the amount of the bonus/premium payable can be calculated on a day-to-day basis.

Since the amount will be paid based on a percentage of a balance deposited, it would be calculated on a principal sum. The bonus is being paid as "an incentive… ". The result of leaving the money on deposit is that the credit union would have use of the deposited money. The bonus payments can therefore be viewed as compensation for the use of the principal sum or the right to the principal sum.

6 September 2013 External T.I. 2013-0478241E5 - U.K. Individual Savings Account (ISA)

Although income earned in a UK Cash ISA is not subject to taxation in the U.K., under the Canadian Income Tax Act ("Act") Canadian residents ... must report their worldwide income, including income earned on investments held in the U.K., for Canadian tax purposes. As such, the interest received or receivable in the year from the investments in a UK Cash ISA must be included in a Canadian resident's income tax return pursuant to paragraph 12(1)(c) of the Act.

CRA also indicated that neither Article 11 nor Article 17 of the Canada-UK Convention would apply to relieve taxation.

5 October 2012 Roundtable, 2012-0453191C6 F - Investissements frauduleux

Earl Jones case was “exceptional”: prior years’ returns generally cannot be amended to exclude fictitious income

An article published in La Presse on the Earl Jones fraudulent scheme case indicated that CRA permitted the investors to file amended returns going back 10 years in order to back out previously reported investment income which, on discovery of the fraud, turned out to have been fictitious. Where it is discovered that fictitious income has been reported, can the victims amend their previously-filed returns rather than only having recourse to a current bad debt deduction? Before going on to discuss the s. 20(1)(p) deduction, CRA stated:

[T]he general position of the CRA in this type of situation is to not allow the investor to amend the investor’s tax returns for prior years in which the "fictitious" income was declared to exclude it from income. Unless there are exceptional circumstances leading to a contrary conclusion, the CRA is generally of the view that at the time the income was reported by an investor, it was a return on the investor’s investment that was to be included in computing the investor’s income.

16 February 2010 External T.I. 2009-0322751E5 F - Traitement fiscal des indemnités reçues

prejudgment interest included in class action award was tax free

In finding that the damages awards in a class action suit, including prejudgment interest were received tax free, CRA referred to the surrogatum principle, and then stated:

[T]he taxation of "prejudgment" interest should follow the tax treatment of the compensation to which it relates, unless such prejudgment interest is in fact interest by its nature. The courts generally define interest as the "return, consideration or compensation for the use or holding by one person of money that belongs to or is due to another person.” …

In this case … only interest at the legal rate and the additional compensation provided for in the Civil Code of Quebec accrued since the date of the judgments of the Superior Court of Quebec must be included in the calculation of the plaintiffs' income under paragraph 12(1)(c).

12 May 2009 External T.I. 2008-0293561E5 - Income from Participating Loan

Respecting a loan made to an arm's length borrower where the terms of the loan include both a fixed rate of interest and a profit participation component, CRA stated that "a participation payment may be considered to be interest where:

  • the payment is limited to a stated percentage of the principal;
  • the limiting percentage reflects the commercial interest rates prevailing between arm's length parties at the time the loan is entered into; and
  • no other facts indicate the presence of an equity investment."

28 September 2006 External T.I. 2006-0189101E5 - Interest Free Loan - Life Lease

A life lease (under which the tenant in a non-profit retirement housing complex makes an interest-free loan to the landlord to help fund construction costs) would be considered to give rise to imputed interest to the tenant equal to the reduction in the rent payable by the tenant as a result of the tenant having made the interest-free loan.

15 December 2006 External T.I. 2006-0182471E5 F - Intérêts " explicitement identifiés "

whether a court order or settlement “explicitly identifies” pre-judgment interest, so as to be taxable, is question of fact

Regarding requested clarification of the position in Income Tax Technical News No. 30 that all pre-judgment interest, which is “explicitly identified” as interest in a court order or out-of-court settlement, will be taxed as interest income, CRA stated:

[T]he tax treatment of pre-judgment interest explicitly identified as described in your request varies according to the specific terms and conditions of each judgment or out-of-court settlement. That determination is essentially a question of fact.

18 May 2006 Internal T.I. 2005-0162821I7 F - Imposition - article 1619 du Code civil

additional indemnity awarded under CCQ Art. 1619, computed by applying an interest rate to damages award, was interest

The Corporation commenced an action against the Insurer (which had refused to pay insurance proceeds on the death of the life of the Insured individual on the grounds that the Corporation had made false representations) to claim the life insurance proceeds. When the action was concluded, the Corporation received from the Insurer a total amount which included an additional indemnity awarded under Article 1619 of the Civil Code of Quebec, which provides that an indemnity may be added to the amount of damages awarded for any reason, to be fixed by applying a referenced interest rate to the amount of the damages, from a referenced date. In finding that the additional indemnity was to be taxed as interest, the Directorate stated:

[T]he courts found that the life insurance policy should be declared valid and the proceeds paid out. On the facts …, we are of the opinion that the Corporation was entitled to receive the life insurance proceeds in … the year of Individual's death. The capital sum insured … can therefore be considered to be an amount of principal owed to the Corporation … on which the Court awarded interest under article 1619 C.C.Q.

Words and Phrases

3 December 2004 External T.I. 2004-0089341E5 F - Intérêts et frais juridiques

interest on amount held in court until judgment rendered was contingent, and non-includible, until judgment rendered

The taxpayer brought an action to recover an amount believed to be payable to her pursuant to a codicil. A preliminary court order directed the amount she sought to be placed in trust pending final judgment in the matter. When judgment was issued in her favour, she received such interest in addition to the judgment amount. In finding that the interest amount was not included in the taxpayer’s income until the year of the judgment, the Directorate stated:

[N]o part of the interest amount can be included in the taxpayer's income in the years prior to the receipt of the amount since no amount was receivable in those years, as the Court's decision had not yet been rendered. In particular, the taxpayer did not have an absolute and unconditional right to receive an amount of interest in the previous years as she did not know whether she would win the case.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees legal fees to recovery a legacy were non-deductible 102

30 September 2004 Internal T.I. 2004-0085051I7 F - Intérêts et indemnité additionnelle

indemnity under CCQ Art. 1619 was pre-judgment interest

A construction company sued a supplier for damages to its business suffered as a result of having been supplied the wrong product and was awarded damages for the costs of repairing the damages (which were accepted as being business income) plus interest and an additional indemnity pursuant to Articles 1618 and 1619 of the Civil Code of Quebec ("CCQ"). In finding that both amounts were interest, the Directorate stated:

[T]he interest awarded by the court under the provisions of Article 1618 CCQ as well as the additional indemnity awarded to the taxpayer under Article 1619 CCQ are interest by their nature since they represent a return, consideration or indemnity for the use or holding by the wrongdoer of a sum of money that was due to the taxpayer. Although the additional indemnity is not explicitly identified as interest in the CCQ, it is nonetheless an amount received "on account of, in lieu of, or in satisfaction of interest". …

Finally … Ahmad … held that pre-judgment interest was not taxable because no amount was owed to the taxpayer before the judgment was rendered. However, such interest is taxable when it is calculated on an amount that is due at the time the judgment is rendered.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 129 - Subsection 129(4) - Income or Loss interest on damages relating to lost business was active business income 268

13 August 2004 Internal T.I. 2004-0076861I7 F - Investissement à l'étranger

return payable on maturity that was not expressed as a percentage or fraction qualified as interest

A resident individual (the taxpayer) lent a sum to a Barbados borrower pursuant to a debenture contract which provided that the return was payable only on the maturity of the debenture, was equal to the return on a linked investment and specified that a portion of such return would include a taxable interest portion and a non-taxable capital gains portion. In finding that all of such return would be interest income, the Directorate stated:

The fact that the amount of interest to be paid at the end of the term of the Debenture is not expressed as a fraction or percentage of the amount lent but rather corresponds to the return generated by a particular investment does not disqualify that income as interest income (see, among others, Re Validity of Section 6 of the Farm Security Act, 1944 (Sask. ), [1947] S.C.R. 394 (S.C.C.), aff'd [1949] A.C. 110 (Prov. Ct.), Re Unconscionable Transactions Relief Act, [1962] O.R. 1103 (C.A.), and The Queen v. Sherway Centre Limited, 98 DTC 6121 (F.C.A.)). Similarly, the fact that the return on the Debenture is not payable until the end of the XXXXXXXXXX year term of the agreement is also irrelevant to the characterization of that income as interest income for purposes of the Act (see The Queen v. Sherway Centre Limited, supra).

Furthermore, such interest was required to be accrued under s. 12(4).

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) s. 75(2) would apply where loan proceeds would ultimately revert to the taxpayer 74
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(2) - Paragraph 108(2)(a) suspension of redemption right for more than one year would disqualify as s. 108(2)(a) trust 131

28 June 2004 Internal T.I. 2004-0073761I7 F - Dommages-intérêts-perte d'emploi

change regarding pre-judgment interest judicially ordered after 2003

After the taxpayer was wrongfully dismissed, an arbitrator ordered that the taxpayer be reinstated and be paid his back pay. The corporate employer wrongfully refused to reinstate the taxpayer, and the taxpayer obtained a court order for damages, reimbursement of legal costs and interest.

The Directorate noted its administrative position (which was changed for orders or out-of-court settlements dated on or after January 1, 2004) was that pre-judgment interest relating to wrongful dismissal awards was not taxable, and that for out-of-court orders or settlements dated on or after January 1, 2004, it will be taxable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance damages for failure to reinstate the taxpayer were a retiring allowance 89
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(l.1) reimbursement of legal costs incurred to recover damages for failure to reinstate were includible under s. 56(1)(l.1) 122
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(o.1) deduction for legal fees incurred to recover damages that were retiring allowance 127

31 May 2004 External T.I. 2004-0074381E5 F - Créance: calcul des intérêts

discount is not interest where its rate is “similar” to yield on similar bonds

Regarding interest-bearing bonds issued at a premium or discount, CRA stated:

[A] premium or discount on a bond does not constitute interest where the effective rate on the bond is similar to the interest rate on similar bonds issued at the same time. Thus, where the taxpayer holds a bond for investment purposes, i.e. the taxpayer is neither a debt trader nor a speculator, and the conditions described above regarding interest rates on bonds are satisfied, the amount of any loss incurred on the disposition of the bond taking into account the premium paid as well as the amount of the gain realized on the disposition of the bond taking into account the discount obtained constitute a capital loss or gain respectively of the taxpayer. The fact that the bond is held for a short period of time does not alter the character of the premium or discount.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(21) overview of s. 20(21) 129

IT-396R "Interest Income"

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 81


Withholding was required on a retiring allowance which was considered to include punitive damages, severance pay and the payment of tuition, whereas no withholding or reporting requirement were required with respect to pre-judgment interest in respect of the wrongful dismissal settlement.


It is the position of RC that pre-judgment, or pre-settlement, interest received in respect of an award for damages for personal injury, death or wrongful dismissal may be excluded from income. Post-judgment interest on an award of damages for wrongful dismissal, calculated from the date of the settlement or judgment, is required to be included in income under s. 12(1)(c).

23 September 1996 Memorandum 962261 (C.T.O. "Partial Payment Rec'd for GIC & Accrued Interest")

"Unless there is any indication to the contrary, payments received in partial payment of debt (in this case, a GIC) should be applied first to interest rather than to principal."

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".

1996 Ruling 961994 (C.T.O. "Structured Settlements")

Favourable ruling where a personal injuries action by the taxpayer, the taxpayer's wife and their children is settled by the defendant agreeing to make periodic payments to the taxpayer's wife and children and, with their consent, arranging to have the obligation to make the payments assumed by two casualty insurers.

IT129R Lawyers' trust accounts and disbursements (Archived)

Interest on Funds of Litigants

10. Where funds deposited with a lawyer by a litigant or litigants for safekeeping and investment, pending a court order or settlement establishing their proper disposition, earn income the Department considers such income to be income of a trust and recognizes that the beneficial owner is the eventual recipient of the funds. Therefore, conditional upon waivers being filed by each of the litigants and the lawyer-trustee for the relevant taxation years, the Department will defer assessment of the income until the recipient is finally determined.

22 August 1995 Internal T.I. 9505576 - PRE-DECISION INTEREST ON RETRO WCB AWARD

Given that a retroactive award for workers' compensation is very similar to an award of damages for personal injury or death, RC will treat the pre-judgment interest component of such an award to not be taxable as interest. "The term 'pre-judgment interest', as used in the context of an award for damages, is used to describe interest payable from the date the damages occurred to the date of the judgment (or settlement, in the case of pre-settlement interest) which requires a defendant to pay a specified sum on account of such damage."

1 May 1995 Internal T.I. 9510657 - DISCOUNTS ON BONDS

"A discount on a bond does not in general have the characteristics of interest where the effective rate of interest on the bond is similar to the rate of interest on similar obligations at the time of issue ... . It is our view that the discount on the Treasury Bills issued by the Government of Canada represents interest (see Edward D. O'Neil, 91 DTC 692 (TCC))"

6 July 1994 Administrative Letter 9323826 F - Bonds Issued in Lieu of Interest

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. However, a reasonable reserve under s. 20(1)(l)(i) in the year the bonds were received could not exceed the difference between the related arrears interest and the fair market value of the bonds so issued.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt issuance of bonds re accrued interest did not constitute payment thereof 64

16 May 1994 T.I. 940456

A court-ordered payment by a corporation to its shareholder would be included in income under s. 12(1)(c) to the extent of pre-judgment interest awarded by the court.

8 April 1993 Internal T.I. 9238487 F - Trust Money in Dispute

interest income in litigation trust is taxable to trust if no waivers issued

Where the litigants and the trustee of a litigation trust have not submitted waivers for each year, income earned by the trust on the trust funds will not be payable to the beneficiaries because the entitlement of the litigants to the funds would not yet be determined. Accordingly, the trust would be subject to tax on such income. Such income, when distributed, would be capital and not subject to tax in the beneficiaries' hands.

The administrative position in IT-129R, para. 10 refers only to funds deposited with lawyers.

29 January 1993 T.I. 9200395 (Tax Window, No. 27, p. 1, ¶2360)

Where a casualty insurer acquires an annuity contract to fund a series of periodic payments to compensate an injured party for lost income and acquires a second annuity contract providing for a series of periodic and balloon payments to fund future medical and personal care expenses, with both series of payments having a guarantee period and specified beneficiaries to whom the payments are directed in the event of the injured person's death before the end of the guarantee period, RC will require the first annuity contract to be non-commutable during the guarantee period or the life of the insured person. However, RC will consider it to be acceptable for the second annuity contract to be commutable after the death of the injured person if payments made under the annuity contract after death are directed to the casualty insurer.

22 January 1993 T.I. 9203635 (Tax Window, No. 27, p. 1, ¶2360)

A structured settlement agreement that provides for balloon payments which the injured person can elect in the future to take either as a lump sum or as a further series of periodic payments (whose terms would be determined at the time of making the election) will not comply with IT-365R2 and, therefore, will not be exempt from tax.

25 March 1992 T.I. (Tax Window, No. 18, p. 18, ¶1829)

Pre-judgment interest awarded or agreed upon in respect of employment income is included in income as interest. On the other hand, pre-judgment interest in respect of damages for personal injury or wrongful dismissal need not be included in income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 27

20 February 1992 T.I. 920074

RC was not prepared to extend its position in respect of pre-judgment or pre-settlement interest for personal injury or wrongful dismissal to other types of settlement such as (in this case) matrimonial settlements.

17 July 1991 T.I. (Tax Window, No. 6, p. 14, ¶1356)

A minimum return on capital paid to a partner may be considered interest income of the partner even though no deduction is available to the partnership.

11 May 1990 Memorandum (October 1990 Access Letter, ¶1494)

Interest received on GST rebates are taxable under s. 12(1)(c).

88 C.R. - F.Q.24

Where a parent provides an interest-free loan to a child, and the child gives the parent a gift which compensates him for the lost interest income, such gift is considered to have been received "as, on account or in lieu of payment of, or in satisfaction of", interest.

86 C.R. - Q.69

A recapture of refund interest previously allowed may be netted against the original refund interest.


Marie-Eve Gosselin, Paul Lynch, "A Review of Interest Deductibility Since Ludco", 2015 CTF Annual Conference paper

CRA challenges to intercompany interest charges (p.7:18)

We have seen challenges [to the reasonableness of the interest rate] in related groups, between sister companies, parents and subsidiaries, and cross border hybrid debt structures. ... We have seen significant reductions to interest rates claimed to nominal amounts and in some cases zero.

Adjustment to recipient's interest inclusion (p. 7:18-7:19)

A ... problem with such adjustments is that they are one-sided. If the debt is within the group, interest expense could be denied, yet the interest income would remain fully taxable.

In some instances, we have seen CRA apply a policy first outlined [in response to Question 39 of the Revenue Canada Roundtable] in 1986 at the Canadian Tax Foundation's annual conference to reduce interest income of the recipient entity. ... This position was confirmed as valid in a CRA technical interpretation. [f.n. 45...2012-0440071E5.]

Lewis, "The Taxation of Structured Settlements", British Tax Review, 1994, No. 1, p. 19

A discussion of authorities supporting the position of Inland Revenue that the full amount of payments under a structured settlement are installers of capital and not income.

Smith, "Corporate Restructuring Issues: Public Corporations", 1990 Corporate Management Tax Conference Report, pp. 6:4-6:6

Discussion of treatment of upward adjustments to the purchase price for shares to compensate the vendor for anticipated delays in the final take-up-and-pay date.

Ulmer, "Taxation of Interest Income", 1990 Conference Report, c. 8.