A Quebec post-secondary student loan program provided for an initial 12-month “full exemption period” (in which the Quebec government paid the interest charged on the loan by the lender) and a subsequent six-month “partial exemption period” (during which the student borrower was required to pay interest on the loan balance). Following the expiry of this 6-month period, any unpaid interest was capitalized. In addressing whether such capitalized interest qualified as being “paid” under a “loan made” under the Quebec financial assistance program so as to generate a credit under s. 118.62, CRA stated:
… The mere addition of accrued interest to the principal amount of an original debt is generally not sufficient in itself to constitute a payment of such interest.
If … the addition of interest to the principal … qualifies as a novation … the amount of interest will be considered paid when the novation occurs and will be eligible for the credit by virtue of section 118.62, if all the conditions set out in that section are otherwise satisfied.
On the other hand, the new debt, resulting from the novation, may no longer be made to the individual under the AFAEE. If this is the case, the interest computed on this new debt would no longer meet the conditions for the application of section 118.62.
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|Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(d)||capitalization of unpaid interest by way of novation constituted its payment||66|
|Tax Topics - General Concepts - Payment & Receipt||capitalization of interest on a novation under Quebec law would constitute its payment||214|