Dear Sirs:
Re: Paragraph 78(1)(b) of the Income Tax Act
This is in reply to your letter of March 14, 1991 and further to our telephone conversation of April 29, 1991 wherein you requested our views on whether or not an election under paragraph 78(1)(b) of the Income Tax Act is necessary or available with respect to accrued compound interest. The facts regarding your hypothetical situation are as follows:
24(1)
It would appear that you have a specific situation in mind relating to a proposed transaction. Confirmation of the tax consequences of such transactions will only be provided in response to a request for an advance income tax ruling. We can, however offer the following general comments with respect to your enquiry.
Our comments
You have correctly stated that compound interest is only deductible under paragraph 20(1)(d) which provides that such interest is deducted only when "paid", as opposed to simple interest which is deductible under paragraph 20(1)(c) if "paid in the year or payable in respect of the year".
In reply to your first question it is our view that
24(1)
With regard to your second question we do not agree with your assumption that an agreement filed under paragraph 78(1)(b) could include the compound interest accrued at 24(1) Subsection 78(1) of the Act refers to "an amount in respect of a deductible outlay or expense that was owing by a taxpayer to a person...". "Deductible" means capable of being deducted for tax purposes.
24(1)
The above comments are only expressions of opinion on the application of the Income Tax Act to the facts presented by you and as such should not be construed as advance income tax rulings, nor are they binding on the Department. Should you require an advance ruling with respect to a specific situation please follow the procedure described in Information Circular IC 70-6R2.
We trust our comments are of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch