Principal Issues: [TaxInterpretations translation] On June 1, 2004, Canco had a non-interest bearing balance of sales receivable of $500,000 from Foreign Co. On June 2, 2005, Foreign Co had repaid $300,000. For purposes of calculating interest under paragraphs 17(1)(a) and 17(1)(b) of the Act, what is Canco's amount owing on May 31, 2005?
Position:
The amount owing is $200,000, which is the portion of the amount owing that "has been or remains outstanding for more than one year”.
Reasons: Interpretation of the Act.
October 16, 2007
Ms. Josée Paquet Auditor - International Tax Income Tax Rulings Directorate Québec Tax Services Office 165 Pointe-aux-Lièvres Street Danielle Bouffard Québec QC G1K 7L3 (613) 590-2155
2007-025316
Subject: Section 17(1) of the Income Tax Act (the "Act")
This is in response to your email of September 21, 2007, regarding the above subject. In particular, you wish to obtain our opinion on the situation described below.
A Canadian corporation ("Canco") has a May 31 taxation year-end. On June 1, 2004, Canco sold a property to a non-resident corporation (Foreign Co), unrelated to Canco. On that date, the non-interest bearing balance of sale price payable by Foreign Co was $500,000. Foreign Co repaid $25,000 on the first of each month.
On June 2, 2005, the balance of the Foreign Co debt was $200,000.
Question
For the purposes of calculating interest under paragraphs 17(1)(a) and 17(1)(b), what is Canco's amount owing on May 31, 2005?
You have submitted two alternatives for calculating such interest: Alternative 1 based on a debt amount of $200,000; and Alternative 2 based on a debt amount of $500,000.
Our Comments
Section 17(1) reads in part as follows:
"Where, at any time in a taxation year of a corporation resident in Canada, a non-resident person owes an amount to the corporation, that amount has been or remains outstanding for more than a year and the total determined under paragraph (b) for the year is less than the amount of interest that would be included in computing the corporation's income for the year in respect of the amount owing if that interest were computed at a reasonable rate for the period in the year during which the amount was owing, the corporation shall include an amount in computing its income for the year equal to the amount, if any, by which
(a) the amount of interest that would be included in computing the corporation's income for the year in respect of the amount owing if that interest were computed at the prescribed rate for the period in the year during which the amount was owing
exceeds(b) the total of all amounts each of which is
(i) an amount included in computing the corporation's income for the year as, on account of, in lieu of or in satisfaction of, interest in respect of the amount owing,
(ii) an amount received or receivable by the corporation from a trust that is included in computing the corporation's income for the year or a subsequent year and that can reasonably be attributed to interest on the amount owing for the period in the year during which the amount was owing, or..."
(our emphasis)
The term “créance” [in the French version] is not a defined term for the purposes of the Act. As already stated in a previous opinion (F 2005-0137041C6), the term "debt obligation" generally means the right of the creditor to receive a sum of money and to demand its payment. On the other hand, the term "amount owing" [in the English version] is not defined for the purposes of the Act, but the word "amount" is defined in subsection 248(1) and means, inter alia, “money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing … .” In the context of section 17(1), the term "owing" is translated as "due" or "payable". Our understanding of the provisions of subsection 17(1) is that only the portion of the debt ("the amount"), expressed in money, that "has been or remains outstanding" for more than one year is relevant for the purposes of calculating interest under paragraphs 17(1)(a) and (b). Furthermore, paragraphs 17(1)(a) and (b) no longer refer to "une créance" or "an amount" but rather to "la créance" or "the amount owing" that has been or remains outstanding for more than a year. In your situation, we are of the view that Alternative 1 should be adopted and thus, for the purposes of calculating interest, the amount owing for the taxation year ended May 31, 2005 was $200,000.
We hope you find these comments of assistance. If you require any further information regarding the content of this letter, please do not hesitate to contact us.
Alain Godin
Manager
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch