2022-0958821E5 T5 filing requirement and impaired debt

Principal Issues: (1) Is there a T5 reporting requirement for a corporation that operates an online peer-to-peer lending platform? (2) Can lenders participating in peer-to-peer lending deduct amounts in respect doubtful or uncollectible loans?

Position: General comments only.

Reasons: Determinations will depend on facts and legal effects of transactions entered into by the parties involved in the arrangements.

Author: Szilagyi, Steven
Section: 20(1)(l), 50(1), 201 of the Income Tax Regulations

XXXXXXXXXX                                                                 2022-095882
                                                                                        Steven Szilagyi

May 9, 2024

Dear XXXXXXXXXX,

Re: T5 Reporting – Peer-to-peer lending

We are writing in response to your request for a technical interpretation dated December 4, 2022 and further to our discussion on February 22, 2023 (Szilagyi/Naufal/XXXXXXXXXX) regarding T5 filing requirements with respect to peer-to-peer lending. We apologize for the delay of our response.

In general terms, you describe that under peer-to-peer lending, a corporation (Corporation) connects borrowers and lenders through an online platform. The Corporation would typically issue payment dependent unsecured interest bearing notes to individual investors (Lenders) for cash consideration. The funds received by the Corporation are immediately loaned (less an applicable loan fee) to borrowers (Borrowers), who are individuals, at a fixed rate of interest. Borrowers make payments to the Corporation consisting of principal and interest. The Corporation, in turn, will make payments to Lenders consisting of principal and interest but only to the extent that corresponding amounts have been received by the Corporation from Borrowers. Lenders acknowledge that they bear all the collection risk in respect of the notes and related Borrower loans. Moreover, the Lenders have no security interest in any property of the Borrowers or the Corporation in respect of the payment dependent notes.

You have asked whether, in the situation described, the Corporation has a requirement to issue T5 slips in respect of the interest portion of the payments on the notes made to the Lenders that correspond to the amounts the Corporation receives from the Borrowers. You have also asked whether Lenders may deduct, in computing income, any amount in respect of uncollectable or doubtful loans.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The tax consequences relating to the above-described arrangements depend on the legal relationships created among the persons under the relevant agreements. The particular facts related to any transaction undertaken by a taxpayer under such arrangements would also need to be considered in determining the tax consequences that may apply. In this regard, a taxpayer may wish to seek professional tax advice. We are prepared however, to provide the following general comments.

T5 Filing Requirement

Subsection 201(1) of the Income Tax Regulations (the “Regulations”) sets out the filing requirements in respect of the payments described therein. In this regard, paragraph 201(1)(b) of the Regulations provides that every person who makes a payment to a resident of Canada as or on account of interest shall make an information return in prescribed form in respect of the portion of such payment for which an information return has not previously been made. The information return consists of the T5 slip and the T5 summary. Interest payments described in paragraph 201(1)(b) of the Regulations include, among other things, interest

(i) on a fully registered bond or debenture;

(ii) in respect of money on loan to or on deposit with, or property of any kind placed with, a corporation, association, organization, institution, partnership, or trust;

(iii) in respect of an account with an investment dealer or broker;

(iv) paid by an insurer in connection with an insurance policy or an annuity contract; or

(v) on an amount owning in respect of compensation for property expropriated.

In addition, subsection 201(2) of the Regulations provides that every person who receives, as nominee or agent, for a person resident in Canada, a payment to which subsection 201(1) of the Regulations applies shall make an information return in prescribed form.

In a situation where a corporation pays interest to a resident of Canada (i) in respect of money on loan to it, (ii) on a fully registered bond or debenture, or (iii) in respect of an account with an investment dealer or broker, the corporation will have a T5 filing requirement. The corporation will also have a T5 filing requirement if it receives an amount, as nominee or agent for a person resident in Canada, in respect of a payment to which subsection 201(1) of the Regulations applies.

Further information regarding the filing requirements with respect to investment income payments is available in Guide T4015, T5 Guide – Return of Investment Income, available on our website at www.cra-arc.gc.ca.

Uncollectible or doubtful loans

The determination of whether a loss in respect of a particular debt or loan may be deducted in computing a taxpayer's income from a business or property or, alternatively, as a capital loss is a mixed question of fact and law.

Reserve for doubtful or impaired debts

In general terms, a taxpayer that is a financial institution or whose ordinary business includes the lending of money may deduct, pursuant to and within the limits described in subparagraph 20(1)(l)(ii) of the Act, a reserve in respect of impaired loans and lending assets. In this regard, subparagraph 20(1)(l)(ii) of the Act is an exception to the general prohibition under paragraph 18(1)(e) of the Act against the deduction of contingency reserves.

A reserve claimed by a taxpayer under paragraph 20(1)(l) of the Act for one taxation year must be included in income in the following taxation year pursuant to paragraph 12(1)(d) of the Act. Thus the reserve claimed for a taxation year is always a new reserve and the whole of the reserve is subject to the conditions specified in paragraph 20(1)(l) of the Act, and not merely any increase in the reserve as it may appear in the taxpayer's accounts.

Bad Debts

Generally, a taxpayer who is an insurer or whose ordinary business included the lending of money may deduct, under clause 20(1)(p)(ii)(A) of the Act, that part of the amortized cost to the taxpayer at the end of the year, of an uncollectible loan or lending asset, made or acquired in the ordinary course of that business.

For an amount to be deductible under subparagraph 20(1)(l)(ii) or clause 20(1)(p)(ii)(A) of the Act, as the case may be, on the basis that the taxpayer's ordinary business included the lending of money, it is not necessary that the taxpayer be a money-lender within the restrictive meaning that may be given to that term in a governing statute. However, it is not sufficient merely that loans are made; they must be made as an integral part of a business operation. It is required that there be a certain system and continuity in the making of loans, and the purpose must not be the occasional investment of surplus funds, accommodation to friends or customers or advances that are intended to remain a part of the capital of the borrower.

Capital debts

Generally, under paragraph 50(1)(a) of the Act, where a taxpayer establishes that an amount receivable on capital account (such as a loan) has become a bad debt in a taxation year, the taxpayer may elect to be deemed to have disposed of the debt at the end of the tax year for nil proceeds and to have immediately reacquired it at a cost of nil. The deemed disposition can result in a capital loss for the year under subsection 39(1) of the Act with any recovery of the debt being a capital gain. Generally, for paragraph 50(1)(a) of the Act to apply in a tax year in respect of a debt owing to a taxpayer, (i) the debt must be owing to the taxpayer at the end of the tax year, (ii) the taxpayer must have established the debt to have become a bad debt in the tax year, and (iii) the taxpayer must elect in their income tax return for the year to have subsection 50(1) of the Act apply in respect of the debt. The time at which a debt becomes a bad debt is a question of fact. Generally, a debt owing to a taxpayer will be a bad debt if

• the taxpayer has exhausted all legal means of collecting on it; or

• the debtor has become insolvent and has no means of repaying it.

Under subparagraph 40(2)(g)(ii) of the Act, a taxpayer's loss arising from the disposition of a debt is nil unless (i) the debt had been acquired by the taxpayer for the purpose of gaining or producing income from a business or property; or (ii) acquired as consideration from the disposition of capital property in an arm's length transaction.

Further information on paragraph 50(1)(a) and subparagraph 40(2)(g)(ii) of the Act is available in Income Tax Folio S4-F8-C1, Business Investment Losses, available on our website at www.cra-arc.gc.ca.

We trust our comments will be of assistance.

Yours truly,

Bob Naufal
Manager
For Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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