Debt owing to the taxpayer following an asset sale provided that interest may be added to the principal of the debt, which is what occurred. The Taxpayer considered that it had paid the accrued and capitalized interest each year, and withheld pursuant to s. 212(1)(b) and added the interest, net of withholding tax, to the balance of its debt. Before concluding that the interest payable at the end of the second year on the interest that was not paid to the creditor in the first year would not be deductible under s. 20(1)(c) and would only be deducible under s. 20(1)(d) when paid, CRA found that:
The facts submitted did not show that there was an actual transfer of money, and that the “mere statement that an amount of interest was added to the principal of the original debt does not seem to us sufficient to conclude that there was a … [fresh] loan between the parties.”
It was not established that there was a novation of the existing debt – there was no evidence of intention to novate, and “the mere addition of unpaid interest to an existing debt does not have the effect of terminating the existing obligation and creating a new one.”
Hill was distinguishable on the basis that, here, there was “no evidence that there was any money available to establish a loan of money.”