Principal Issues: [TaxInterpretations translation] Request for clarification of the Canada Revenue Agency's administrative position in Technical News No. 30 where it uses the term "explicitly identified as interest".
Position: General comments.
Reasons: Question of fact
2006-018247 XXXXXXXXXX Anne Dagenais (613) 957-2121 December 15, 2006
Dear Madam,
Subject: Request for technical interpretation - Technical News No 30 - Meaning of 'explicitly identified as interest”
This is in response to your email of April 20, 2006, in which you asked for our opinion on the above subject. We apologize for the delay in responding to your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Case studies
You are seeking clarification of the Canada Revenue Agency's ("CRA") administrative position set out in Income Tax Technical News No. 30 where the CRA states that all pre-judgment interest, which is explicitly identified as interest in a court order or out-of-court settlement, will be taxed as interest income.
You submitted examples for which it will be useful to know the application of the administrative position:
(1) If the judgment or settlement specifies the amount of the settlement and the amount of interest, it seems to you that it satisfies the requirement of being explicitly identified.
(2) If, in the judgment or out-of-court settlement, the amount of the settlement is specified as well as an interest rate for calculating the amount of interest, it seems to you that this still satisfies the requirement of being explicitly identified.
(3) If the judgment or out-of-court settlement only states a total settlement amount without specifying an amount for interest, it seems to you that interest is not explicitly identified.
(4) Where the judgment or settlement only states a total settlement amount without specifying an amount for interest and the total amount received exceeds the claimant's original claim, you asked whether it is possible to contend that the difference is attributable to explicitly identified interest.
(5) Where the agreement to pay a full settlement amount contains a clause to the effect that the amount received constitutes full, complete and final payment of principal, interest and costs in respect of all alleged damages and claims of whatever nature, is it possible to establish an explicitly identified amount of interest if no amount of interest or rate of interest is specified and the amount of the judgment or settlement is global?
Your Opinion
In your view, the interest that can be calculated in situations 3, 4 and 5 would be "implicit" interest and not, by definition, explicitly identified interest. Indeed, two people could establish, by different calculations, different amounts of interest for the same situation. In order for interest to be explicitly identified, it seems to you that no misunderstanding should be possible as to the quantum of interest.
Furthermore, you understand that in order to be taxed as interest, the amounts must, by their nature, represent interest. You recognize that interest must meet the following three criteria: the amount must accrue on a daily basis, the amount must be calculated by reference to a principal amount (or a right to a principal amount) and it must represent consideration for the use of the principal amount (or right to the principal amount). You wondered whether it is possible to establish the "implicit" interest by respecting the three criteria above.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments, which may not apply in full to the situation you have submitted to us.
Given the general nature of the information you have provided, it is not possible for us to respond in a precise manner to your various situations. Indeed, the tax treatment of pre-judgment interest explicitly identified as described in your request varies according to the specific terms and conditions of each judgment or out-of-court settlement. That determination is essentially a question of fact.
Consequently, the only comments we can provide in this case are those found in the Income Tax Technical News No. 30, dealing with the expression "explicitly identified".
However, we will be happy to consider any subsequent request for a specific situation including all relevant facts and documents.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate