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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Interest free period - Is obligation subject to Reg 7000
Position TAKEN:
Yes
Reasons FOR POSITION TAKEN:
Law
940839
XXXXXXXXXX M. Cooke
Attention: XXXXXXXXXX
April 18, 1994
Dear Sirs:
Re: Prescribed Debt Obligations ("PDO's")
This is in reply to your letter of April 4, 1994, in which you requested our views concerning the application of subsection 12(9) and Regulation 7000 of the Income Tax Act on mortgage loans which have both an interest bearing and an interest-free period.
Generally, these types of debt obligations would be PDO's pursuant to paragraph 7000(1)(c) of the Regulations. Accordingly, a holder of such an obligation would be required to accrue interest in accordance with the rules found in subsection 7000(2) of the Regulations.
The calculation of the deemed interest is the responsibility of the holder of the particular PDO and since the calculation depends on a number of factors which are known only to the holder it is not possible for the Department to provide an interest calculation, nor is it possible for us to comment specifically on the fact situation presented in your letter. However, we will provide you with some general comments as to how interest is calculated under subsection 7000(2).
Depending on the terms of the particular debt obligation, the holder would be required to calculate the interest under paragraph 7000(2)(c) or draft paragraph 7000(2)(c.1). Paragraph 7000(2)(c) provides that the interest that accrues each year is the greater of the maximum interest in respect of the year and the interest computed on a yield to maturity basis ("YTM"). Draft paragraph 7000(2)(c.1), which applies to certain escalating debt obligations commencing in 1993, provides that the interest that accrues each year is calculated on a YTM basis only, thereby eliminating any potential over accrual.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, and are not binding on the Department.
for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1994
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1994
Email this Content