2016-0626841E5 18(5) and 20(1)(d)

Principal Issues: Whether for purposes of subsection 18(4) of the Act, the amount of outstanding debts to specified non-residents for a particular taxation year includes accrued simple interest upon which compound interest is computed but not paid in the year.

Position: No.

Reasons: The amount of outstanding debts to specified non-residents of a corporation only includes amounts on which interest is deductible in computing the income of the corporation.

Author: Ho, Judy
Section: 18(5), 20(1)(d)

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                                                                    2016-062684
                                                                    Judy Ho, CPA, CA

March 4, 2016

Re: Outstanding debts to specified non-residents

Dear XXXXXXXXXX,

We are writing in response to your email dated January 14, 2016, wherein you requested our comments with regards to the determination of “outstanding debts to specified non-residents”, as defined in subsection 18(5) of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended (the “Act”).  You described a hypothetical scenario where a Canadian corporation (“Canco”) has an outstanding, interest-bearing loan owing to a specified non-resident. The debt accrues a simple interest, as well as a compound interest, which is based on the balance of the unpaid simple interest. Both simple and compound interest balances remain unpaid at the end of a particular taxation year.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

In the case of a corporation, subsection 18(5) of the Act defines “outstanding debts to specified non-residents” as the total of all amounts outstanding on account of a debt or other obligation that was payable by a corporation to a person who was a specified non-resident shareholder (or a non-resident who does not deal at arms-length with a specified non-resident shareholder) and on which any amount in respect of interest paid or payable by the corporation is or would be, but for subsection (4), deductible in computing the corporation's income for the year.

Pursuant to paragraph 20(1)(d) of the Act, compound interest may only be deducted in computing a taxpayer’s income if it is paid.  Accordingly, if in the situation described, compound interest accrues on simple interest but is not paid in the year, the compound interest is not deductible by Canco.  Therefore, the liability in respect of the accrued simple interest would not meet the definition of “outstanding debts to specified non-residents” in subsection 18(5) of the Act.

We trust these comments are of assistance.

Vitaliy Anissimov
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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