| 913304 | |
| 24(1) | C. Tremblay |
| (613) 952-1361 |
Attention: 19(1)
January 3, 1992
Dear Sirs:
Re: Waiver of interest on demand promissory note
This is in reply to your letter of November 27, 1991, concerning a request that section 80 of the Income Tax Act (the "Act") will not apply to a waiver of interest on a demand promissory note in the following situation.
24(1)
The situation that is described appears to involve a series of actual completed transactions. It is not the Department's practice to give written opinions concerning completed transactions, as indicated in Information Circular 70-6R.
Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.
Our Comments
In our view a simple waiver of interest has no legal effect so that the creditor still has a clear legal right to receive the interest. Interpretation Bulletin IT 396R, at paragraph 4, states "Interest is receivable by a taxpayer when there is a clear legal right to receive it". Paragraph 5 goes on to state, "Under the accrual method, interest is considered to be earned on a daily basis, regardless of when the interest debt becomes receivable or is received." Thus, in our view, the creditor must, pursuant to subsection 12(4) of the Act, include in income the amount of interest receivable pursuant to the debt obligation.
If, however, the waiver is made legally binding on both parties (in the form of an amending agreement, for instance,) then it would appear that the creditor would have no legal right to receive interest as of the date such amending agreement is entered into and up to the end of the period specified thereunder. Conversely the debtor would not have a legal obligation to pay interest for the same period.
It should be noted that unless a waiver is made legally binding on both parties, the provisions of subsection 78(1) of the Act will apply to the interest which remains unpaid at the end of the second taxation year following the taxation year in which it was incurred.
A promissory note which has been amended by a legally binding agreement to provide that no interest is payable for a period of time and that interest is payable at a commercial rate thereafter would appear to be a debt obligation described in paragraph 7000(1)(c) of the Regulations.
Generally, it is the Department's view that when an interest bearing debt (the "Old Debt") becomes non-interest bearing (the "New Debt"), the Old Debt is disposed of (see paragraph 7 of IT-448). We also note that there could be a section 80 issue if the shareholders' loans were originally interest bearing and later became non-interest bearing (this would not include a waiver of interest on the loans.) If the value of the New Debt is less than the principal amount of the Old Debt, section 80 would apply.
Also, in a case where property has been disposed of at non-arm's length in exchange for a promissory note with a face value equal to the fair market value of the property, and the promissory note is subject to conditions which could restrict the right of the holder to demand payment, the fair market value of the note may be less than that of the property. While section 69 will apply to deem the vendor to have received proceeds equal to the fair market value of the property, the cost base to the purchaser may be less.
We trust our comments are of assistance
Yours truly,
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch