A loan owing by Canco to a specified non-resident accrues simple interest, as well as compound interest on the balance of the unpaid simple interest, with both simple and compound interest remaining unpaid at the end the taxation year. How is the “outstanding debts to specified non-residents” determined? After referencing the requirement in the definition that the “outstanding debts to specified non-residents” be “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,” CRA stated:
Pursuant to paragraph 20(1)(d)… compound interest may only be deducted in computing a taxpayer’s income if it is paid. Accordingly, if…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… .