Dear Sirs:
Re: Subsection 74.5(2) of the Income Tax Act (the "Act")
This is in reply to your letter dated August 23, 1991 wherein you requested our opinion as to whether the attribution rules would apply if the interest payable on a loan is paid within 30 days after the end of the calendar year in which the interest became payable.
Subsection 74.5(2) of the Act provides an exemption from the attribution rules contained in subsections 74.1(1) and 74.1(2) and section 74.2 of the Act for loans of property that bear a commercial rate of interest. A loan is considered to bear a commercial rate of interest for purposes of this subsection if interest is charged on the loan at a rate not less than either the prescribed rate of interest or the rate that would have been agreed upon between arm's length parties under similar circumstances at the time the indebtedness was incurred. There is no attribution in respect of income for a year only if the interest that is payable on the loan in respect of that year and each preceding year has in fact been paid not later than 30 days after the end of each such year.
The provision contained in subsection 74.5(2) of the Act contemplates that only bona fide transactions are exempt from the attribution rules contained in subsections 74.1(1) and (2) and section 74.2 of the Act. It is a question of fact whether a transaction was entered into for bona fide purposes and whether the application of the general anti-avoidance provision in subsection 245(2) of the Act may be warranted in a particular situation.
Therefore, assuming that a bona fide loan is provided on September 30, 1991 with interest payable annually, the interest payable in respect of this loan on September 30, 1992 must be paid within 30 days of the end of the 1992 calendar year in order to avoid the attribution rules contained in subsections 74.1 (1) and 74.1(2) and section 74.2 of the Act.
We trust our comments will be of some assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch