| 5-913332 | |
| Robert Gagnon | |
| (613) 957-8953 |
24(1)
19(1)
February 28, 1992
Dear Sirs:
Re: Subsections 12(4) and 78(1) of the Income Tax Act
This is in reply to your letter of November 28, 1991 requesting a technical interpretation concerning the interaction of subsections 12(4) and 78(1) of the Income Tax Act ("Act") to investment contracts acquired before 1990.
Subsection 12(4) of the Act requires an individual holding in a taxation year an interest in an investment contract on any third anniversary of the contract to include in his income all interest accrued to the third anniversary date to the extent that the interest was not otherwise included in computing his income for the taxation year or any preceding taxation year, and to the extent that the interest accrued to him after December 31, 1981. However, this provision does not apply if the taxpayer has made an election under subsection 12(8) of the Act.
A loan provided to a corporation by a shareholder of the corporation is an investment contract unless the loan is excluded by paragraph 12(11)(a) of the Act. Where interest incurred by the corporation in a taxation year on such a loan is unpaid at the end of the second taxation year following the taxation year in which interest was incurred, the shareholder and the corporation may file a joint agreement under paragraph 78(1)(b) of the Act. Then, the unpaid interest in question is deemed to have been paid by the corporation to the shareholder on the first day of the third taxation year following the year in which interest was incurred.
An election under paragraph 78(1)(b) of the Act does not preclude the application of subsection 12(4). As stated in subsection 12(4), the inclusion is "...to the extent that the interest was not otherwise included in computing his income for the taxation year...". Interest may be included in computing income pursuant to paragraphs 12(1)(c) and 78(1)(b) of the Act. However, under subsection 12(4) of the Act, interest accrued on a loan to a third anniversary will be included in computing income in the taxation year of the third anniversary to the extent it is not included in computing income for the taxation year or any preceding taxation year pursuant to the application of paragraphs 12(1)(c) and 78(1)(b) of the Act or any other disposition of the Act.
The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
for directorFinancial Industries DivisionRulings Directorate