Principal Issues: Can an investor claim a deduction where interest income has been accrued and reported but not received?
Position: The investor may be eligible to claim a reserve for doubtful debt or a bad debt write off.
Reasons: Paragraph 20(1)(l) of the Act allows a reasonable amount to be claimed as a reserve in respect of doubtful debts, while paragraph 20(1)(p) allows a deduction for bad debts.
XXXXXXXXXX
2010-037994
V. SrikanthOctober 7, 2010
Dear XXXXXXXXXX :
Re: Interest accrued and reported but not received
This is in response to your correspondence dated September 10, 2010 wherein you requested our views on whether a taxpayer can claim a deduction in respect of interest income that he or she reported on an accrual basis but did not receive. Specifically, you have described a situation where some individuals ("Investors") invested in bonds of a certain corporation. The corporation issued T5 slips to the investors for interest accrued on those bonds. However, the Investors did not receive any payments for the accrued interest when they became due. You have, therefore, requested our views on whether the Investors could claim a deduction in respect of the interest income that they reported on their individual tax returns.
Our Comments
This appears to be an actual situation. It should be noted that written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advance Income Tax Rulings. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. If, however, the particular transactions are completed or partially completed, the enquiry should be addressed to the relevant Tax Services Office. Your request was not submitted in the format required for an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries which are not binding and we are prepared to provide you with the following comments.
As explained to you during a telephone conversation (XXXXXXXXXX / Srikanth) on September 9, 2010, paragraph 12(1)(c) of the Income Tax Act (the "Act") requires a taxpayer to include in income for a year "any amount received or receivable in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's profit) as... interest to the extent that the interest was not included in computing the taxpayer's income for a preceding year".
In our view, interest income, which has been accrued on bonds and reported on a T5 but not paid and not covered by the Canada Deposit Insurance Corporation (CDIC), is not considered to be received, and a reserve pursuant to paragraph 20(1)(l) of the Act may be available to those individuals holding such bonds. The reserve for doubtful debts is based on the accrued portion of the interest not paid, not likely to be paid and not reimbursed by deposit insurance, if applicable. The reserve for doubtful debts claimed by a taxpayer under paragraph 20(1)(l) of the Act for one taxation year must be included in income in the next following taxation year pursuant to paragraph 12(1)(d) of the Act and may be further reserved again to the extent provided for under paragraph 20(1)(l) of the Act. This process could continue for several years, until such time as the amount of the bad debt with respect to accrued but unpaid interest is finally established, at which time a deduction for the bad debt is allowed pursuant to paragraph 20(1)(p) of the Act.
Alternatively, if no reserve for doubtful debts has been claimed and the interest receivable has become a bad debt, a deduction may be claimed under paragraph 20(1)(p) in that year. Please note that whether a deduction is claimed under paragraph 20(1)(1) or 20(1)(p), the onus of proof rests on the taxpayer to establish that the debt is doubtful for collection or a bad debt.
We trust our comments will be of assistance to you.
Yours truly,
R.A. Albert, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch