1 August 1990 Income Tax Severed Letter ACC9357 - Interpretation of "Debt Obligation"

24(1)
                                 5-900756
                                 Peter Lee
                                 (613) 957-2745

Attention: 19(1)

August 1, 1990

Dear Sirs:

Re: Subsection 12(3) of the Income Tax Act (the "Act")

This is in reply to your letter of May 7, 1990, in which you requested our opinion with respect to the meaning of the term "debt obligation" in subsection 12(3).

The term "debt obligation", as used in subsection 12(3), is not defined in the Act and accordingly must be interpreted in its ordinary meaning. In Beament Estate v. M.N.R., 69 DTC 5016 (Ex Cr), Jackette, J., interpreted the word "debt" to mean "a sum payable in respect of a liquidated money demand, recoverable by action".

As you are aware, prior to the Bill C-139 amendments to subsection 12(3), there was no reference in subsection 12(3) to debt obligations. The former subsection 12(3), as applicable to accrued interest, simply provided that such accrued interest would be included in computing income. By virtue of former subsection 12(4), an amount determined in prescribed manner on an annuity contract was deemed to accrue to a taxpayer as interest, even though an annuity contract does not earn interest income per se and is generally not considered to be a debt obligation. The amendment to former subsection 12(3) was incidental to the addition of section 12.2 and subsection 12(9). Consequently, subsection 12(3) restricts its application to accrued interest on debt obligations. Debt obligations do not include life insurance policies and annuity contracts referred to in section 12.2 but do include prescribed debt obligations referred to in subsection 12(9).

We hope that our comments are helpful to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate