On June 1, 2018, Mrs. B lent $500,000 to Mr. B at the prescribed rate of interest (2%) and, at the beginning of January 2019, Mr. B issued a demand promissory note as absolute payment of the accrued interest of $5,863.01. Banner Pharmacaps stated that “delivery of a promissory note may itself be payment of a particular obligation.” Does the issuance of this note satisfy the requirement in s. 74.5(1)(b) that the 2018 interest on the loan be paid no later than 30 days after the end of 2018?
After noting that since the indebtedness at issue was a loan, the applicable requirement instead was in ss. 74.5(2), CRA stated;
Paragraphs 74.5(2)(b) and (c), as with subparagraphs 74.5(1)(b)(ii) and (iii), are part of a set of rules intended, inter alia, to prevent a taxpayer and the taxpayer’s spouse from sharing income from property (including by means of loans bearing insufficient or no interest) to reduce the total amount of tax payable on that income. In that context, a textual, contextual and purposive interpretation of paragraphs 74.5(2)(b) and (c) and subparagraphs 74.5(1)(b)(ii) and (iii) favours a more restrictive interpretation of the word "paid", according to which the issuance of a note, although irrevocable, unrestricted and payable on demand, does not satisfy the requirement provided for in those paragraphs and subparagraphs.
It follows that … the exception provided for in subsection 74.5(2) could not apply.