20 November 2012 External T.I. 2012-0449671E5 - Accrued Interest Income Reported on T5 Slips

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether accrued interest should be reported on T5 slips.

Position: Yes

Reasons: Accrued interest is taxable under the Act and is reportable on the T5 as per the Regulations.

XXXXXXXXXX
2012-044967
Andrea Boyle, CGA

November 20, 2012

Dear XXXXXXXXXX:

Re: Accrued Interest Reporting on T5

We are writing in reply to your fax received May 29, 2012 in which you asked us to confirm whether or not all interest, both paid and accrued, should be reported on T5 slips.

In this situation, a corporation issued debentures on which, due to cash flow issues, interest was paid for the first half of the year, but not paid for the second half of the year. T5 slips were issued that included all amounts due and payable in the year including unpaid interest. You indicated that investors who are individuals have questioned why they were issued T5 slips for interest which they did not receive.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

Under paragraph 12(1)(c) of the Act, any amount received or receivable by the taxpayer in the year ("depending on the method regularly followed by the taxpayer in computing the taxpayer's income") as interest is included in computing the income of a taxpayer for a taxation year to the extent that the interest was not included in computing the taxpayer's income for a preceding taxation year. Individuals who report their income on the receivable basis would include the full amount of interest shown on the T5 slip. Individuals who report on the received basis could report the interest received, subject to the requirements of subsection 12(4) of the Act, which ensures that an accrual approach is used in recognizing interest income for individuals.

Under subsection 12(4), where an individual holds an interest in an "investment contract", the interest that accrues to the taxpayer to the end of each anniversary day of the contract is included in the taxpayer's income for the year, to the extent that the interest was not otherwise included in computing the taxpayer's income for the year or any preceding taxation year.

An "investment contract" is defined under subsection 12(11) and includes any debt obligation other than, among other things, an obligation in respect of which the taxpayer has, at least once a year, included the interest accrued on the investment in income throughout the period in which the taxpayer held the debt obligation.

In other words, an individual can include interest receivable on the debenture in income annually under paragraph 12(1)(c) – in which case the investment would be excluded from the subsection 12(11) definition of an "investment contract". Alternatively, the investment would be considered to be an "investment contract" and accrued interest would need to be included in income under subsection 12(4) on each anniversary date of the investment contract.

As stated in "Chapter 4 – T5 slip" of document T4015 T5 Guide – Return of Investment Income 2011: "For investment contracts acquired after 1989, you have to report accrued interest every year. Base this calculation on the date the investment contract was issued." It is clear, therefore, that accrued interest should be reported on the T-5 slips issued for the debentures.

Where interest income was receivable and reported on a T5 slip, a reserve pursuant to paragraph 20(1)(l) of the Act may be available. The reserve for doubtful debts under 20(1)(l) is based on the accrued portion of the interest not paid, not likely to be paid and not reimbursed by deposit insurance, if applicable. The reserve for doubtful debts claimed by a taxpayer under paragraph 20(1)(l) for one taxation year must be included in income in the next following taxation year pursuant to paragraph 12(1)(d) and a reserve may be taken again in that following year to the extent provided for under paragraph 20(1)(l) of the Act.

This "reserve" process could continue for several years, until such time as the amount of the bad debt with respect to receivable but unpaid interest is finally established, at which time a deduction for the bad debt is allowed pursuant to paragraph 20(1)(p). Alternatively, of course, a deduction may be claimed under paragraph 20(1)(p) for interest receivable which has become a bad debt in a year even if no reserve for doubtful debts has been previously claimed. It should be noted that, in either case, when a deduction is claimed under paragraph 20(1)(1) or 20(1)(p), the onus of proof rests on the taxpayer to establish that the debt is either doubtful for collection or a bad debt.

We trust that these comments will be of assistance.

Yours truly,

Doug Watson
for Director
Corporate Financing Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch