Section 16

Subsection 16(1) - Income and capital combined


Plains Midstream Canada ULC v. Canada, 2019 FCA 57

s. 16(1) can only apply to a debtor if it equally applies to the creditor

As part of a complex set of transactions, a predecessor of the taxpayer agreed to assume a $225M loan that was due in perhaps 43-years’ time and that was non-interest-bearing (except in the remote event of oil production from the Beaufort Sea) in consideration inter alia for the payment to it of $17.5 million by the debtor. The predecessor treated the $207.5M difference between these two amounts as an amount which, although conceded not to be interest in form, was interest in substance and therefore could be treated as being recharacterized as interest under s. 16(1): the economic substance of the situation was that it received $17.5 million as the present value of $225 million.

Key points for Hogan J below in rejecting this position were that the taxpayer received significant benefits for assuming the loan in addition to being paid the $17.5M and that none of the amounts to be paid to the Japanese creditor (APCJ ) were interest in economic substance (or, of course, legal form) to it, Nadon JA stated (at paras. 84, 90):

Subsection 16(1) provides that where, under a contract or other arrangement, an amount can be reasonably regarded as part interest and part capital, the part that can reasonably be regarded as interest, shall “be deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable…”. This can only mean, with respect to the contrary view, that the amount which can reasonably be regarded as interest must necessarily be regarded as interest by the recipient of the amount, that is the person to “whom the amount is paid or payable…”. It is implicit, if not express, in the words of the provision that the amount which can reasonably be regarded as being interest is an amount that is paid or payable to a person. …

[I]t is because interest is, by its nature, symmetrical that the Judge was correct in interpreting subsection 16(1) in the way that he did. In other words, an amount is not interest if it does not have the character of interest to both the recipient and the payor.

He went on to also find (at para. 97) that there was no reversible error below in considering that, in any event, the $207.5M amount did not qualify in economic substance as interest to the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) interest by its nature is symmetrical 247

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

requires distinguishing of capital sum and interest

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.

Before concluding that this sum constituted interest for purposes of the Act rather than proceeds of disposition, Linden J.A. referred to s. 16 and stated (p. 5123) that "therefore, the interest paid to James Shaw should be distinguished from the capital sum paid to him as proceeds of disposition of his expropriated property".

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

not applicable where mortgages receivable were all on income account

The taxpayer, which was a real estate developer, received mortgages from the purchasers of its condominiums which had a fair market value lower than their face amount due to their below-market rates of interest. In finding that subsection 16(1) was not applicable, Cullen J. stated (p. 5434):

"In my opinion, the principal amount of the mortgages is a payment in the nature of income to the plaintiff, in that it is the proceeds of the sale of the property by the plaintiff in the course of business. I do not see it as a blended payment of income and capital combined, which is the situation with which subsection 16(1) is designed to deal. I find it difficult to accept the plaintiff's characterization of the difference between the face value of the mortgage principal and the fair market value of the mortgage as interest within the meaning of subsection 16(1)."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) mortgages included in proceeds at their principal amount rather than lower FMV 55
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Inventory 44

Alepin v. The Queen, 79 DTC 5259 (FCTD)

payments applied first to interest

The taxpayer was paid $1,000,000 of the sale price of land which previously had been sold by it, at a time when the purchaser was in arrears in respect of interest on an hypothec securing payment of the sale price. Since there was no agreement between the taxpayer and the purchaser that the whole of the $1,000,000 should be paid as a payment of principal, and since the Civil Code indicated that payments prima facie should be applied to any overdue interest, it was found that $93,702 of the $1,000,000 was correctly treated as interest.

Rodman Construction Inc. v. The Queen, 75 DTC 5038, [1975] CTC 73 (FCTD)

not applicable where purchase price at FMV

An owner of Canadian land mortgaged his land on a non-interest bearing basis and then sold the land to the taxpayer, a non-resident, which assumed the mortgage. Decary, J. stated that in determining whether interest should be imputed on the payments to the taxpayer "the prime factor to be considered is whether or not the fair market value has been paid" and accepted the taxpayer's evidence that the purchase price for the property was equal to its fair market value. "There is a difference between a loan without interest granted someone and a loan without interest assumed by a third party."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) 79

Vanwest Logging Co. Ltd. v. MNR, 71 DTC 5120 (Ex Ct)

not applicable where no evidence that purchase price was excessive

The taxpayer sold some of its timber limits for $7.5 million: $1.5 million payable up front; and the balance in five equal annual instalments, with no provision being made for interest on the unpaid balance except in the event of default.

Walsh J. noted that, unlike the Groulx decision, there was no evidence of any discussion respecting interest (rather than paying a higher price), there was no provision of a discount for prepayment of the instalments and there was no evidence that it was the almost invariable practice in the industry to charge interest on instalment sales. After indicating (at p. 5134) that he "would not necessarily reach a different conclusion on these factors alone", he went on to note (see pp. 5134, 5136) that, on the "decisive element" of the question of price there was no "evidence justifying a conclusion of fact that the price was excessive and could only be justified by not charging interest on the deferred instalments" and concluded (at p. 5136):

"I do not consider that section 7(1) can be applied by the Minister in all cases where no interest is claimed on deferred payments, but rather that it should only be used when something in the evidence indicates that it was the intention of the vendor to avoid taxation on interest by including it as part of a larger capital payment that would otherwise have been made."

Groulx v. MNR, 67 DTC 5284, [1967] CTC 422, [1968] R.C.S. 6

applied where purchase price was increased with non-interest earing instalments

A farmer, after initially being offered $350,000 for his farm, negotiated its sale for $395,000, of which $310,000 was payable in non-interest bearing instalments payable over an extended period of time from the date of sale. The instalments received by him were found to include an element of interest given that: under normal business practice such instalments would have borne interest at 5% or 6%; the selling price was higher than the market value of the farm; the taxpayer himself proposed the non-payment of interest; and his purported reasons for making this proposal were weak.

MNR v. Mandelbaum, 62 DTC 1093 (Ex Ct)

no-application where mortgage receivables on income account

The taxpayers, who were shareholders of a company that was being pressured by its bank to dispose of non-interest bearing conditional sales contracts and mortgage receivables owing to it, purchased those agreements and mortgages for a lump sum purchase price equal to 65% of the amounts owing. Before going on to find that the full amount of the gain subsequently realized by the taxpayers when the mortgages and agreements matured was income from business, Thorson P. rejected (at p. 1097) an argument that s. 7 of the 1952 Act applied to deem a portion of the amounts received by them to be interest income:

"As between the Respondents and Sunnibilt there is nothing of a capital nature in any of the payments under the mortgages and agreements and I am unable to see how any of the profit realized by the respondents from their purchase of the mortgages and agreements could possibly be regarded as an accretion of their capital."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business individuals purchased mortgages in similar manner to dealers, so that an adventure 111
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Loans/receivables 243

See Also

Plains Midstream Canada ULC v. The Queen, 2017 TCC 207, aff'd 2019 FCA 57

s. 16(1) operates symmetrically (no creditor interest – no debtor interest deduction)

The taxpayer (“Amoco”) acquired Dome Petroleum in 1988 for $5.2B pursuant to a Plan of Arrangement. Prior to this acquisition, Dome Petroleum was jointly and severally liable with a corporation that was 42.1% owned by it (“Encor”) under a loan for $400 million (the “exploration loan”) owing to a Japanese lender (“APCJ”). The exploration loan: as between Dome Petroleum and Encor was agreed to be borne as to $175 million and $225 million, respectively; was effectively non-interest-bearing (as it bore interest based on the level of oil production from Beaufort Sea deposits); and matured in 2030 subject to earlier repayment events. As one of the steps that was necessary in order to secure approval and implementation of the Plan of Arrangement, Amoco assumed the obligations of Encor under the exploration loan in consideration inter alia for Encor paying Amoco $17.5 million and agreeing to vote in favour of the Plan of Arrangement and to cooperate with Amoco in the renegotiation of the loan with APCJ.

In filing its returns, Amoco deducted the difference, between the $225 million loan amount that was so assumed by it and the $17.5 million paid to it, as simple interest on a straight line basis (i.e., about $5M per year). Before trial, it reduced its interest deduction claim to $1,043,700, determined by applying a simple interest rate of 5.964% to the $17.5 million that it had received from Encor. Its position was that under s. 16(1), regard should be had to the economic substance of the situation, which was that it received $17.5 million as the present value of $225 million.

In findng that Amoco was not entitled to deduct the claimed interest, Hogan J agreed (at para. 57) that "the economic substance of the Key Transactions must be considered," but stated (at paras 58, 60, 68):

…The language used in subsection 16(1) of the ITA stating that the payment is “deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable” reflects Parliament’s intention that both parties receive symmetrical treatment. In other words, the amount is deemed to be interest for both parties. …

… [N]o part of the amount that is due by the Appellant can reasonably be regarded as interest that is payable to APCJ under the terms and conditions of the exploration loan. …

… [I]t is unthinkable that Parliament would have intended the asymmetrical treatment proposed by the Appellant as this would open the door to transactions in which one party receives a tax benefit and the other party receives a non-taxable payment... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base ACB addition based on future amount payable rather than much lower FMV 237

FLSmidth Ltd. v. The Queen, 2012 DTC 1052 [at 2745], 2012 TCC 3, aff'd 2013 DTC 5118 [at 6147], 2013 FCA 160

regard to economic substance

Paris J rejected the taxpayer's submission (to the effect that the phrase "can reasonably be regarded" in s. 20(12) did not permit the Minister to look to the economic substance of arrangements given that it did not also contain the language, contained in ss. 16(1) and 68, authorizing the Minister to go beyond the "form or legal effect" of the arrangements), stating (at para. 63):

The words "irrespective of . . . the form or legal effect thereof" found in subsection 16(1) and "irrespective of the form or legal effect of the contract or agreement" found in section 68 do not modify the phrase "can reasonably be regarded" but instead relate to the deeming provision which follows in each case which deems certain types of income to have been received by the taxpayer. There is no such deeming provision in subsection 20(12).

Lehigh Cement Limited v. The Queen, 2009 DTC 776, 2009 TCC 237, rev'd 2010 DTC 6844, 2010 FCA 124

stripped interest coupons on principal still owing were not blended payments
rev'd on other grounds 2010 DTC 6844, 2010 FCA 124

In finding that the taxpayer was entitled to deduct the full amount of the interest coupon payments made by it on a periodic basis to a Belgian bank, Mogan, D.J. noted that although when the Belgian bank looked at the quarterly interest payments, it saw "43/50 of each amount as a recovery of capital and 7/50 of each amount as interest," this represented the wrong point of view. From the taxpayer's perspective, each interest coupon payment represented the payment in full of interest, given that $140,000,000 of principal remained outstanding after each interest coupon payment.

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

discount treated as interest

In the taxation years in question, the taxpayer purchased significant quantities of treasury bills through its broker and sold them one day prior to maturity. The full amount of the discount was assessed as interest.

Dussault, TCCJ. found that the words of s. 16(1) (as it read for years before July 1988) were "sufficiently wide to cover the situation where proceeds of disposition are received in secondary market transactions one day before maturity when part of those proceeds can reasonably be regarded as interest accrued to that day" (p. 1063). Although the difference between the sale price and the purchase price also could be included in the taxpayer's income from property, it should instead be treated as interest under the more specific provisions of the Act applying to interest.

O'Neil v. MNR, 91 DTC 692 (TCC)

T-Bill discount

The difference between the purchase price and the face amount of treasury bills was included in the taxpayer's income when they matured.

Administrative Policy

7 October 2020 APFF Roundtable Q. 16, 2020-0867071C6 F - APFF Q.16 - Withholding tax on swap payment

interest is no longer imputed on mismatched cross-border swap payments

In Q.60 at the 1984 CTF Roundtable, the Department suggested that where swap payments are not made contemporaneously, for example, payments under the swap agreement are made by Canco to a non-arm’s length non-resident corporation (NRco) annually, whereas NRco makes its payments to Canco quarterly, withholding tax may apply to a portion of the outbound payments that represents an interest element.

Without referring specifically to s. 16, CRA indicated that this position was contrary to Shell Canada, which found that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected – so that withholding tax would not apply in such a situation absent a finding of sham or the application of a specific provision, e.g., s. 245 or 247.

5 September 2020 IFA Roundtable, Q.2 is similar.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Swaps all amounts payable or receivable under a swap are on income account 124

18 April 2013 Internal T.I. 2013-0485481I7 F - Balance of sale price without interest

s. 16(1) inapplicable if sale price including non-interest bearing balance does not exceed sold assets’ FMV

A corporation sells its business, with there being a non-interest bearing balance of the sale price which it considers to be referable to the value of the goodwill sold. Does s. 16(1) apply? CRA stated:

Since the date of the cancellation of Interpretation Bulletin IT-265R3, there have been no legislative changes or court decisions reversing … [CRA’s] position …. As a result, we are of the view that paragraphs 8 to 10 [thereof] … still represent the CRA's position with respect to deferred or instalment payments.

Thus, if you have no indication that the sale price is higher than the fair market value of the assets which were sold, it is possible that subsection 16(1) would not apply in your file.

9 September 2002 Internal T.I. 2002-0149007 - BLENDED PAYMENT, INTEREST

Where payment of interest charged by a U.S. parent to its Canadian subsidiary was deferred and it was agreed that payments by the subsidiary to the parent would be applied first to reduce principal, s. 16(1) would not apply to deem portions of the payments by the Canadian subsidiary to the parent to be interest.

IT-233R "Lease-Option Agreement; Sale-Lease Back Agreements"

Where it is determined that a lease agreement is, in substance, a sale agreement, the vendor will be required to include an amount under s. 16(1) where the fair market value of the property is less than the amounts to be paid over the term of the lease agreement.

3 December 1992 T.I. 921655 (C.T.O. "Factoring Accounts Receivable Whether Sale or Loan"; Tax Window, No. 26, p. 5, ¶2315)

Discussion of whether an arrangement between a taxable Canadian corporation and its U.S. wholly-owned subsidiary should be characterized as entailing the factoring of accounts receivable, or the making of a loan secured by accounts receivable. If the latter, the discount is subject to withholding tax under ss.16(1)(a) and 212(1)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(b) - Subparagraph 212(1)(b)(i) non-arm’s length terms on sale of trade receivables to sub would indicate that it in fact was a non-arm’s length loan 328

IT-265R3 "Payments of Income and Capital Combined" - cancelled in 1991.

1. Subsection 16(1) deals with those situations where, under a contract or arrangement, a payment of income and capital combined is received or is receivable by a taxpayer. This type of payment is known as a "blended payment"... .

2. A blended payment can be described as an amount, the make-up of which is not definitely ascertainable. In other words, there must be some uncertainty as to the portion of the payment that is capital and the portion that can reasonably be regarded as interest or some other type of income, such as the profit on a sale transaction. However, if all the constituent elements of a payment are provided for in a contract or arrangement, and are reasonable, the payment is not a blended payment and subsection 16(1) does not apply. ...

12. Where an amount is required by subsection 16(1) to be included in the income of the recipient, the payer may be entitled to deduct that same amount in computing income for the relevant taxation year. Prior to July 1988, paragraph 20(1)(k) authorized this deduction provided the payment of the amount was related to funds borrowed in order to earn income from a business or property or was related to the acquisition of property for that purpose. Since amounts determined under paragraph 16(1)(a) after June 1988 are deemed to be interest on a debt obligation, the general provisions of paragraph 20(1)(c) relating to the deductibility of interest apply and may permit the same deduction to the payer as previously allowed under paragraph 20(1)(k). Amounts, other than interest, that are required to be included in the recipient's income under paragraph 16(1)(b) may be deducted by the payer if they were incurred to earn business or property income... .

IT-233R "Lease-Option Agreements; Sale-Leaseback Agreements"

Discussion of the application of s. 16(1) to a sale-leaseback arrangement which is characterized as a sale, where the fair market value of the property is less than the future rental payments.


Mike Vantil, Greg C. Boehmer, "Caveat Venditor: Let the Seller Beware", Corporate Structures and Groups, Vol VII, No. 3, 2002, p. 372: Discussion of Application of s. 16(1)(a) to Sale Transactions.

Richardson, "Purchase and Sale of a Business: Income Tax Aspects of Warranties, Price Adjustments, and Earn-Outs", 1990 Corporate Management Tax Conference, pp. 10:8-10:9

Discussion of instalment sales.

Subsection 16(3) - Obligation issued at discount