Principal Issues: If interest paid on unpaid equalization payment under a separation agreement is considered income of the person receiving the interest payments.
Position: Yes
Reasons: Interest income is generally taxable and included in income pursuant to paragraph 12(1)(c) of the Income Tax Act.
XXXXXXXXXX 2009-032462 V. Srikanth June 15, 2009
Dear XXXXXXXXXX :
Re: Reporting of interest on unpaid equalization payments
This is in response to your e-mail dated May 28, 2009, wherein you requested our opinion as to whether interest paid on an unpaid equalization payment under a separation agreement is considered income of the person receiving the interest payments. You also indicated that you received a response from us, via telephone, on this issue, but you would now like to have our written opinion.
Our Comments
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 as 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 advance income tax rulings and we are prepared to provide you with the following comments.
As indicated in our telephone response, interest income is generally taxable and included in income pursuant to paragraph 12(1)(c) of the Income Tax Act (the "Act"). The courts have described interest in general terms as "the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to or owed to another". It is a question of fact whether an amount paid under the terms of a court order or settlement constitutes interest income. Based on the information you have provided, it appears that the interest paid on the unpaid equalization payment falls within the provisions of paragraph 12(1)(c) of the Act. Hence, in our view, such amount will have to be reported as interest income.
As you are aware, as indicated in our document E 2002-013350, a T5 supplementary may not be used to report interest paid to an ex-spouse on an equalization payment. Under our self-assessment system, the onus is on a taxpayer to file his or her income tax return accurately.
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