Principal Issue: [TaxInterpretations translation]
Paragraph 20(1)(c) provides that the interest deduction is limited to the lesser of an amount paid or payable and a reasonable amount in respect thereof. What factors would the CCRA consider in determining whether the amount of interest payable under a particular loan agreement exceeds a "reasonable amount in respect thereof"?
Position:
The interest deduction under paragraph 20(1)(c) is the lesser of the amount paid or payable and a reasonable amount. As stated in Shell, "[w]here an interest rate is established in a market of lenders and borrowers acting at arm’s length from each other, it is generally a reasonable rate… .” In assessing whether or not an interest rate is reasonable, one must consider comparable market rates for similar market risks as well as the existence of issue premiums.
Reason: Shell case.
FINANCIAL PRODUCTS ROUNDTABLE
APFF - CONFERENCE 2003
Question 6
Deduction of a reasonable amount for interest
Paragraph 20(1)(c) provides that a taxpayer may deduct interest on borrowed money in computing income from a business or property if the requirements of that paragraph are satisfied. However, that paragraph also specifies that the deduction is limited to “the amount of interest paid or payable” and “a reasonable amount in respect thereof, whichever is the lesser”, “pursuant to a legal obligation to pay interest”.
Given the potential multiplicity of loan agreements, what factors would the CCRA consider in determining whether the amount of interest payable under a particular loan agreement exceeds a "reasonable amount in respect thereof"?
CCRA response
The interest deduction under paragraph 20(1)(c) is the lesser of the amount paid or payable and a reasonable amount. As stated in Shell, "[w]here an interest rate is established in a market of lenders and borrowers acting at arm’s length from each other, it is generally a reasonable rate… ". In assessing whether or not an interest rate is reasonable, one must take into account comparable market rates for similar market risks and terms and the existence of issue premiums.
Louise J. Roy
October 10, 2003
2003-003568