Revenue Canada Taxation Head Office
D.S. Delorey (613) 957-2129
April 16, 1986
Dear Sirs:
This is in reply to your letter of January 22 concerning interest received pursuant to subsection 164(3) of the Income Tax Act (the "Act") on a refund occasioned by an allowance of an objection to, or appeal against, an assessment of tax.
In particular, you ask whether paragraph 12(1)(c) or subsection 12(3) of the Act is applicable to such interest received by a corporate taxpayer and in what taxation year the corporation is required to include the interest in income. As indicated in paragraph 14 of Interpretation Bulletin 396R, such interest is taxable under paragraph 12(l)(c) of the Act. With respect to your concerns about subsection 12(3) of the Act, it is our view that this subsection would never apply because in order for there to be a requirement to accrue, the existence of a debt obligation must first be established. In our view, the date that the existence of the debt obligation is established would be the same date that the relevant interest becomes an amount receivable and thus taxable under paragraph 12(1)(c) of the Act.
As indicated in paragraph 4 of IT-396R , the date that interest becomes receivable is the date on which the taxpayer has a clear legal right to receive the interest. Pursuant to subsection 164(3) of the Act, the Minister does not have an obligation with respect to the interest until the overpayment or amount in dispute is refunded or repaid. Thus, the taxpayer has no clear right to receive the interest until that time. Normally, the subsection 164(3) interest will be paid at the time that the relevant amount is refunded or repaid to the taxpayer. Thus, for the purposes of paragraph 12(1)(c) of the Act, both the date that the interest becomes an amount receivable and the date it is received are usually one and the same. However, if for some reason the interest is paid subsequent to the time that the relevant amount is refunded or repaid to the taxpayer, the Department's administrative practice is to not require the taxpayer to include the interest in income prior to the taxation year in which it is received.
We have not commented on your reference to subsection 164(4) of the Act as that subsection concerns itself with interest payable, rather than receivable, by the taxpayer.
With respect to the last point mentioned in your letter, it is our view that interest received pursuant to subsection 164(3) of the Act represents income from property for the purposes of the Act. This view is based on the premise that the source of the interest is the funds refunded or repaid.
We trust that the above comments will be of assistance.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
c.c. Carolyn Ritchie Assessing Division