Principal Issues: Is a reduction in interest income in exchange for a reduction in club dues taxable?
Position: Yes
Reasons: Barter transaction
XXXXXXXXXX 2005-016537 C. Tremblay, CMA (613) 957-2139 March 16, 2006
Dear XXXXXXXXXX:
Re: Interest Income and Offset
This is in reply to your letter of December 22, 2005, wherein you requested our opinion on whether a recipient of a secured debenture bearing interest at 6% from a golf club is taxable on the full amount of interest at 6% in a situation where he or she elects to have the interest rate reduced in exchange for a reduction of his or her annual club dues at the golf club.
Our Comments:
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following general comments.
Reductions of interest rates given in consideration for reductions in annual club dues are subject to taxation. A reduced interest or an interest-free loan exchanged for reduced club dues is considered to be a barter transaction. Thus, in your example, the member who elects to receive a reduced interest rate in exchange for reduced annual club dues is still taxable on the full interest at 6%. In our view, the club dues reduction falls into the meaning of the words in paragraph 2 of Interpretation Bulletin IT-396R, entitled Interest Income which states in (b) that a taxpayer is considered to receive a payment when there is an offset against an amount owing by the taxpayer.
We trust our comments are of assistance.
Yours truly,
Roberta Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate