| 920775 | |
| Claude Tremblay | |
| (613) 952-1361 |
March 19, 1992
CLIENT ASSISTANCE DIRECTORATERulings DirectorateT1 Returns and Guides Division
Attention: Norm O' Donnell, A/Chief
24(1)
We are writing in response to a memorandum of March 11, 1992, from J. Carkner, of Client Assistance Directorate and further to a telephone conversation (Lisa Loyko Baker / Claude Tremblay) of March 17, 1992, regarding account holders, investment certificate holders and shareholders of 24(1). We were advised that all individual investors have recently received T5 slips. The T5 slips were prepared and issued for interest paid, credited or accrued on insured as well as on uninsured amounts from various interest sources and that the T5's do not provide identification about the type or source of interest. Individual investors are concerned about the taxability of the amounts shown as income. You seek our comments as to the tax consequences to these individuals.
Our Comments
In our view, interest which has been credited to an investor's account on the maturity of an investment contract or interest credited to a savings or other account issued by 24(1) is considered to be received for income tax purposes. Accordingly, this interest amount is required to be included in the investor's income for the taxation year in which the interest was credited, except to the extent it was reported in a previous year. Further, no reserve under paragraph 20(1)(l) of the Income Tax Act (the "Act") is available to these taxpayers. Where interest which is credited to an investor on the maturity of an investment contract is reinvested in a new investment contract, it forms part of the cost of the new investment.
However, in our view, interest income, which has been accrued on the investment certificates and T5'd but not paid and not covered by CDIC insurance is not considered to be received and a reserve pursuant to paragraph 20(1)(l) of the Act is available to those individuals holding such investment certificates. The reserve for doubtful debts is based on the accrued portion of the interest not paid, not likely to be paid and not reimbursed by the deposit insurance. The reserve for doubtful debts claimed by a taxpayer under paragraph 20(1)(l) of the Act for one taxation year must be included in income in the next following taxation year pursuant to the rule in paragraph 12(1)(d) of the Act and may be further reserved against to the extent provided for under paragraph 20(1)(l) of the Act. This process could continue for several years, until such time as the amount of the bad debt with respect to accrued but unpaid interest is finally established, at which time a deduction for the bad debt is allowed pursuant to paragraph 20(1)(p) of the Act.
24(1)
As a result (assuming the interest was included in income) such taxpayers will normally be entitled to benefit from the reserve under the provisions of paragraph 20(1)(l) of the Act for the amount of the cheque less the insured portion and the probable collectible portion. This allows for a reserve in respect of interest that has been included in a taxpayer's income but the collection of which is doubtful.
In our view, the provisions of subsection 50(1) of the Act would apply to the capital portion of the uncollectible and uninsured portion of the investment (ie. certificates, savings, checking accounts, uncashed cheques) in the year the individual investor establishes the obligation to have become a bad debt. The investor shall be deemed to have disposed of the obligation at the end of the year for proceeds of nil and to have reacquired it immediately thereafter at a cost equal to nil. It appears that capital loss treatment might be applicable to the taxpayers as 24(1) does not appear to be a small business corporation.
In our view, subsection 20(21) of the Act was really meant for overaccruals and has no application to the 24(1) situation. Taxpayers who owned shares in 24(1) would generally realize a capital loss on their investments. 24(1) does not appear to be a CCPC nor a small business corporation. From a timing perspective, the taxation year in which any such loss is to be claimed will be the earlier of the year in which there is an actual disposition or the year in which paragraph 50(1)(b) of the Act applies. That paragraph applies when the corporation has become a bankrupt, has had a winding-up order made or has ceased to carry on business and is insolvent (see paragraph 50(1)(b) of the Act for other tests which must be met if insolvency is being relied on to trigger the deemed disposition). This will be a question of fact.
We trust our comments will be of assistance to you
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch