ARCHIVED - Interest Income

What the "Archived Content" notice means for interpretation bulletins

NO: IT-396R

DATE: May 29, 1984

SUBJECT: INCOME TAX ACT
Interest Income

REFERENCE: Paragraph 12(1)(c) (also subsections 12(3) to (11), 16(1), 20(14) 20(21) and 70(1) and subsection 201(4) and Part LXX of the Income Tax Regulations)

This bulletin replaces and cancels IT-396 dated October 17, 1977, IT-284R dated January 30, 1978 and Special Release to IT-284R dated December 28, 1982.

1. This bulletin explains certain requirements of the Income Tax Act relating to the computation and reporting of interest income. Paragraph 12(1)(c) requires a taxpayer to report interest income either when it is received (commonly referred to as the "cash method") or when it is receivable. The provisions of paragraph 12(1)(c) are, however, subject to the overriding provisions described in 8 and 9 below, some of which were newly enacted effective for taxation years commencing after 1982 and, among other changes, impose, for the first time on individuals, the requirement to use the accrual method for reporting interest income (i.e. the three-year accrual method). For taxation years commencing before 1983 the Department accepted (on an optional basis) the accrual method for reporting interest income under paragraph 12(1)(c).

Cash Method

2. Interest is received by a taxpayer, or by a financial agent acting on the taxpayer's behalf, at the time when payment of the interest debt is made in cash or its equivalent. For example, a taxpayer is considered to receive payment when

(a) there is a credit to the taxpayer's bank account,

(b) there is an offset against an amount owing by the taxpayer,

(c) a cheque is accepted as payment,

(d) the value of a commodity is accepted in lieu of cash, or

(e) a new term deposit certificate is issued for interest earned on a matured certificate.

3. Receipt of interest represented by matured bond interest coupons is considered to occur only when they are in fact cashed, sold, given in payment of debt, or otherwise negotiated. However, for taxation years commencing after 1982 all individuals will be required to report, at least every third year, interest income on the accrual basis with respect to certain debt obligations whether or not interest thereon is payable by coupon. See 18 to 27 below for an explanation of this new requirement and other special matters.

Receivable Method

4. Interest is receivable by a taxpayer when there is a clear legal right to receive it. To illustrate, assume that a taxpayer purchased a $1,000 bond on its issue date of April 1, 1980, bearing interest at 9% payable by semi-annual coupon on April 1 and October 1. On October 1, 1980, interest in the amount of $45 would be receivable by the taxpayer, since that is the amount which is legally payable on that day and would be the amount to be reported as income in 1980 under the receivable method even though the October 1st coupon was not negotiated until 1981 or a subsequent year. Interest in the amount of $45 would be receivable by the taxpayer twice yearly on April 1 and October 1 of 1981 and each subsequent year throughout the term of the bond. Under the receivable method the taxpayer would report the sum of $90 as interest income for 1981 and each subsequent taxation year throughout which the taxpayer held the bond. If the bond matures on April 1, 1990, income for that year would be $45.

Accrual Method

5. Under the accrual method, interest is considered to be earned on a daily basis, regardless of when the interest debt becomes receivable or is received. In the example given in 4 above, a taxpayer using the accrual method would report interest of $67.80 in 1980 for the 275 days in the year during which he owned the bond, calculated as follows:

(275 ÷ 365) x 9% × $1,000 = $67.80

With respect only to Canada Savings Bonds, it is acceptable to accrue interest on a bond year basis (October 31 to November 1) rather than on a calendar year bases (see 25 below). Although the accrual method of calculating interest was a common accounting concept, its use was not mandatory for tax purposes until the enactment of subsection 12(3), effective for the 1975 and subsequent taxation years, which required its use by certain taxpayers, classified generally as financial corporations. Subsection 12(3) was amended for taxation years commencing after October 28, 1980 to extend the requirement to certain other corporations, partnerships and certain trusts and was further amended for taxation years commencing after 1982, to clarify that the interest accrual requirement applies only where there is a debt obligation (see 15 to 17 below). The requirement to use the accrual method to report interest income was, with certain deferrals and exclusions, extended to individuals for taxation years commencing after 1982 (see 18 to 27 below).

"Method Regularly Followed"

6. The words in paragraph 12(1)(c) "depending upon the method regularly followed by the taxpayer in computing his profit" are interpreted to refer to the taxpayer's method of accounting for net interest income from a particular source and not necessarily to the taxpayer's method of accounting for other types of income. For example, a taxpayer who might have consistently used the received (cash) method to report interest income from bonds without coupons will have established a "method regularly followed". If that method is reasonable in the circumstances, paragraph 12(1)(c) requires the taxpayer to retain its use from year to year except where, as discussed later in this bulletin, a change in method becomes obligatory or is made voluntarily by electing under subsection 12(8). Although paragraph 12(1)(c) permits a taxpayer to report interest income from different sources using different methods, it is the Department's position that interest from the same source (i.e. same payer, on same type of interest-yielding property) must be reported, within the confines of that paragraph, using the same method.

7. For taxation years commencing before 1983, in respect of debt obligations to which subsection 12(3) did not apply (paragraph 12(1)(c) having application), taxpayers were permitted to change from the received (cash) method of reporting interest income to the receivable or accrual method, or from the receivable method to the accrual method, if they had a valid reason for changing and had obtained prior approval from the Department to do so. Additionally, individuals were permitted to change to either the receivable or accrual method of reporting interest income simply by filing a return on that basis and provided the change was made for the purpose only of taking advantage of the interest and dividend income deduction. It was the Department's position, for those same years, that any such changes would not be permitted retroactively and that, once effected, they were irreversible. Taxpayers were not, under any circumstances, permitted to change to or to revert to the received (cash) method from either the receivable or the accrual method at any time. For taxation years commencing after 1982 in respect of debt obligations to which paragraph 12(1)(c) continues to apply, the above rules continue to apply, but subject to the following exceptions. Taxpayers who used the accrual method, as outlined in 5 above, to report interest income from particular debt obligations for the last taxation year commencing before 1983 should continue to use that method. In these circumstances an election pursuant to subsection 12(8) (see 21 below) to use the accrual method of reporting with respect to a particular obligation will not be required. However, except where a taxpayer is, by virtue of subsection 12(3), required to use the accrual method to report interest income, that method may not be used, on an annual basis, in respect of a debt obligation acquired in any taxation year commencing after 1982 unless an election with respect thereto has been made in accordance with subsection 12(8). Similarly, where a taxpayer used the received (cash) or receivable method in the last taxation year commencing before 1983 to report interest on an obligation acquired in that or a prior year, a change to the accrual method for taxation years commencing after 1982 can be accomplished only by means of an election under subsection 12(8).

Overriding Provisions in Special Circumstances

8. As indicated in 1 above, paragraph 12(1)(c) is not applicable where any other provision in the Act requires a different method of reporting interest income. The following provisions require that interest income be reported on the accrual basis in certain circumstances

Subsections 12(3) to (11)

- Interest income of individuals, corporations, partnerships and certain trusts (see 15 to 27 below).

Subsections 20 (14)

- Where a debt obligation (other than an income bond, an income debenture, a small business development bond or a small business bond) is transferred between interest dates, the transferor must follow the accrual method and include in income for the year of transfer the amount of interest accrued from the preceding interest date except to the extent that it was otherwise included in computing income for the year or a preceding taxation year (see IT-410).

Subsection 70(1)

- Interest accrued from the last date on which interest was payable to the date of death of a taxpayer is required to be included in income for the year of death (see IT-210R).

9. Interest that is actually received by one person may be deemed by specific provision of the Act to be received by another person. Some of the more common examples of such provisions are the following:

(a) Interest received by a person on a property transferred from that person's spouse may, by virtue of section 74, be deemed to be income of the transferor (see IT-258R2).

(b) Interest received by a person under 18 years of age on a property transferred to that person by a taxpayer may, by virtue of section 75, be deemed to be income of the taxpayer (see IT-260R).

(c) An interest payment made to another person under the direction of, or with the concurrence of, the owner of an interest-bearing property for the owner's benefit, or as a benefit that the owner desired to confer on the other person, is, by virtue of subsection 56(2), required to be included in the owner's income (see IT-335).

10. Uncashed matured bond interest coupons on hand at the date of death of a taxpayer who reported this type of income under the cash method are considered to be "rights or things" as described in subsection 70(2) of the Act. Accordingly, even though this income was not received in cash by the taxpayer, it is required to be included in income in the final return for the year of death unless the taxpayer's legal representative elects to file a separate return as provided in subsection 70(2) or the coupons are transferred or distributed to a beneficiary within the time specified in subsection 70(3). The applicable treatment in such situations is described in IT-212R.

Interest Distinguished from Other Receipts

11. In the absence of evidence of a contrary intent between the parties, amounts recovered on an interest-bearing obligation that is in arrears are presumed to represent interest until all interest due under the obligation to the time of payment has been recovered.

12. Interest, while not defined in the Act, has been described in general terms in the Courts as "the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another". From this description, it follows that interest does not arise unless there is an amount due to, or belonging to, another person for the period for which the interest is calculated. Consequently, it is the Department's position that where, after 1983, an award for damages is made either by a court or by means of an out-of-court settlement which includes, or is augmented by, an amount stated, either by the court or in the terms of the settlement, to be in fact interest on all or a portion of the award, such amount will constitute interest income in the hands of the recipient thereof for all purposes of the Act. This position arises from the fact that a liability for damages is considered to originate on the date on which an injury occurred and there is therefore an amount owing to, or belonging to, the injured party from that date. It is immaterial that the amount owing was not determinable until a later date because once the right to receive damages has been established, that right exists from the time at which the injury giving rise to those damages occurred. Similarly, where an enforceable agreement for the sale of property is executed but the negotiated price is not paid until a subsequent date, any interest that is received by the vendor for the period from the date of the agreement to the date of payment is interest income in the vendor's hands. For example, an enforceable agreement for the purchase and sale of real property at a price of $100,000 is entered into with a closing date of January 1, 1981. However, payment of this amount is not made until May 1, 1982 and interest of $12,000 (calculated as 9% of $100,000 for 16 months), in addition to the $100,000, is paid by the purchaser to compensate the vendor for the delay. The $12,000 is interest income to the vendor. The foregoing remarks may apply with respect to interest on sums owing where property is expropriated. However, certain amounts described in some Expropriation Acts as "interest" are not necessarily interest income but are considered to be part of the disposal proceeds. For more information in this respect, refer to IT-271R, "Expropriations - Time and Proceeds of Disposition".

13. In the example in 12 above, had there been no enforceable agreement executed prior to May 1, 1982, the purchaser would not have been liable to pay the $100,000 at all. Accordingly, the additional $12,000 paid by the purchaser would then simply have represented an upward adjustment to the sale price of the property from $100,000 to $112,000, and the $12,000 is not interest for tax purposes. Similarly, because no principal sum is payable and no right to compensation exists at any time prior to its approval for payment, no part of any award or grant received by a taxpayer from a source such as a crime compensation board or the War Claims Fund will be included in income regardless of the fact that some part of such award or grant may be measured or determined by reference to an interest calculation. However, any interest for the period commencing at the date on which compensation is approved and ending with the date of payment of such compensation, would be interest for tax purposes.

14. A statutory reduction in the amount of an obligation created under statute that is computed by the application of a rate of interest to payments made in advance of the due date for payment of the obligation is not regarded as interest but rather as a reduction of the amount otherwise payable. Provision is made for such reductions in some provincial legislation governing property taxes levied by municipalities. However, interest credited on overpayment of a statutory obligation is taxable under paragraph 12(1)(c), even when applied against another liability under the same statute. Interest allowed on overpayment of tax assessed under the Income Tax Act is one example of this latter situation.

Corporations, Partnerships and Trusts

15. Applicable to taxation years commencing after 1982, subsection 12(3) requires any corporation, partnership, unit trust or any trust of which a corporation or a partnership is a beneficiary to include, in computing its income for a taxation year, interest on a debt obligation that accrued to it to the end of the year or became receivable or was received by it before the end of the year, to the extent that such interest was not included in its income for a preceding year. Specifically excluded from such interest is interest in respect of an income bond, an income debenture, a small business development bond or a small business bond. For taxation years commencing after October 28, 1980 and before 1983, subsection 12(3) required all corporations, partnerships, unit trusts and any trust of which a corporation or a partnership was a beneficiary, to include in income, interest from all sources that accrued or became receivable or was received in a taxation year to the extent that such interest had not been so included in any previous year. However, for taxation years commencing after October 28, 1980 and before 1983, the accrual rules of subsection 12(3) were, by virtue of subsection 12(5) as it applied for those taxation years, inapplicable in respect of interest on any obligation acquired before October 29, 1980 by a corporation, partnership or trust, not described in 16(a) to (e) below, unless the obligation was issued by a person with whom the corporation, trust or any member of the partnership was not dealing at arm's length. For taxation years commencing before October 29, 1980 subsection 12(3) applied, with certain exceptions, to require the accrual of interest by taxpayers classified generally as financial corporations.

16. A taxpayer that is a corporation, partnership or trust, other than a taxpayer described in (a) to (e) below, may by virtue of subsection 12(5), defer using the accrual method, which otherwise would be required by subsection 12(3), to report interest income from a debt obligation last acquired before October 29, 1980,

(i) for a limited period, comprised of the taxation years commencing after 1982 and ending before December 31, 1984, with respect to the interest accruing on the obligation after the beginning of the taxpayer's first taxation year commencing after November 12, 1981, and

(ii) indefinitely, with respect only to the interest accrued on the obligation before the beginning of the taxpayer's first taxation year commencing after November 12, 1981,

provided that the obligation was issued by a person with whom the corporation, trust, or each member of the partnership, as the case might be, was dealing at arm's length. However, it should be noted that a taxpayer, when not subject to the provisions of subsection 12(3) in respect of a debt obligation, by virtue of subsection 12(5), remains subject to the provisions of paragraph 12(1)(c) in respect thereof and to the Department's positions relating to that paragraph as set out in 7 above. Subsection 12(5) does not, under any circumstances, operate to defer the application of subsection 12(3) where the holder of a debt obligation is

(a) a bank to which the Bank Act or the Quebec Savings Banks Act applies,

(b) a corporation licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee,

(c) a credit union within the meaning assigned by subsection 137(6),

(d) a life insurance corporation, or

(e) any other corporation (other than a mutual fund corporation or a mortgage investment corporation) whose principal business is the making of loans or that borrows money from the public in the course of carrying on a business the principal purpose of which is the making of loans.

17. Applicable to taxation years commencing after 1982, subsection 12(6) exempts a taxpayer, other than a taxpayer described in 16(a) to (e) above, from the accrual rules of subsection 12(3) in respect of any debt obligation that was last acquired before October 29, 1980, provided that

(a) the taxpayer could not, after October 28, 1980 and before the end of the taxation year, require the repayment, acquisition, cancellation or conversion of the obligation other than by reason of a failure or default under the terms or conditions thereof (i.e. the taxpayer is locked in),

(b) the maturity date of the obligation has not been extended after October 28, 1980 and before the end of the taxation year, and the terms or conditions relating to payments with respect to interest have not been changed during that period, and

(c) the obligation was issued by a person with whom the taxpayer or, where the taxpayer is a partnership, each member thereof, was dealing at arm's length.

However, a taxpayer, when not subject to the provisions of subsection 12(3) in respect of a debt obligation, by virtue of subsection 12(6), remains subject to the provisions of paragraph 12(1)(c) in respect thereof and to the Department's positions relating to that paragraph as set out in 7 above.

Other Taxpayers

18. Applicable to taxation years commencing after 1982, but subject to the exemption explained in 22 below, a taxpayer, other than a corporation, partnership, unit trust or any trust of which a corporation or partnership is a beneficiary, who holds an interest in an investment contract (see 19 below) on any third anniversary thereof (see 20 below) and has not made an election under subsection 12(8) (see 21 below) is, by virtue of subsection 12(4), required to report interest income in respect thereof on the accrual basis on any third anniversary of the contract to the extent that such interest accrued after December 31, 1981 and was not otherwise included in computing income for the taxation year or any preceding taxation year. In addition, where interest in respect of an investment contract is actually received by a taxpayer in a particular taxation year, it must, by virtue of paragraph 12(1)(c), be included in computing income for that year to the extent that it was not otherwise included in income for the year or a previous year. By reason of the fact that the issuer of a debt obligation that is considered to be an investment contract will issue a T5 information slip to the holder of the obligation as of every third anniversary thereof (unless the holder has previously elected under subsection 12(8) in respect of the debt obligation) to indicate the amount of interest accrued thereon at that time, taxpayers who have included interest in respect of the obligation in income for intervening years should ensure that interest is not included in income more than once.

19. An investment contract, as referred to in 18 above, is defined in paragraph 12(11)(a) to mean any debt obligation (other than a prescribed contract, an income bond, an income debenture, a small business development bond, a small business bond or an obligation in respect of which the taxpayer has, at periodic intervals of less than three years, included in computing income throughout the period in which the taxpayer held an interest in the obligation, the income accrued thereon for such intervals). The latter exclusion will include any debt obligation in respect of which a taxpayer has made an election pursuant to subsection 12(8) in any taxation year commencing after 1982 or is receiving interest on a regular basis at intervals of less than three years. A prescribed contract will include a tax-exempt registered retirement savings plan. Any debt obligation, including a prescribed debt obligation, will be an investment contract unless it is specifically excluded by the definition thereof, but a taxpayer may, by virtue of subsection 12(10) (see 22 below), be exempt from the provisions of subsection 12(4) with respect to interest on a particular investment contract. Without restricting the generality of the definition of an investment contract, the term "debt obligation" is considered to include, for example, bank accounts, term deposits, guaranteed investment certificates, Canada Savings Bonds, mortgages, corporate bonds and loans.

20. Applicable to taxation years commencing after 1981, the third anniversary of an investment contract, as referred to in 18 above, is defined in paragraph 12(11)(b) to mean

(a) the 31st day of December that is three years after the end of the calendar year during which the contract was issued, and

(b) the 31st day of December of every successive third year following the date determined in (a),

except that where a taxpayer last acquired an investment contract before 1982 and has not disposed of it before 1985, it will be deemed to have been issued on December 31, 1984 for the purpose of establishing anniversary dates. Consequently, an investment contract that was last acquired by a taxpayer before 1982 is exempt from the accrual rules in subsection 12(4) at least until 1987.

21. For taxation years commencing after 1982, a taxpayer who desires to use the accrual method to report, annually, interest income in respect of a debt obligation, must elect to do so in accordance with subsection 12(8). However, see 7 above for exceptions with respect to obligations acquired prior to 1983. This election must therefore be made by a taxpayer who proposes to use the annual accrual method in respect of a debt obligation for the first time. The election in respect of any debt obligation, other than either a debt obligation in bearer form or a Canada Savings Bond, is to be made by notifying the issuer of the obligation, in writing, of the taxpayer's intention to report interest income on the annual accrual basis. Upon receipt of this notification, the issuer of the particular debt obligation will report annually, on T5 information slips, the interest accrued thereon to the end of each calendar year commencing with the year designated in the taxpayer's election, to the extent that interest in respect of that obligation was not previously so reported. An election in respect of a debt obligation in bearer form or a Canada Savings Bond should be filed with the taxpayer's tax return for the year with respect to which the use of the annual accrual method is first elected. Issuers of debt obligations in bearer form and Canada Savings Bonds are not required to report interest on the accrual basis on form T5 by virtue of subsection 201(4) of the Income Tax Regulations. Having made an election under subsection 12(8), the taxpayer is obligated in computing income for the year for which the election was made and for each subsequent year during which an interest in the debt obligation is held, to include the interest accrued on that debt obligation to the end of the year to the extent that the interest was not otherwise included in income for the year or any preceding year. An election made pursuant to subsection 12(8) in respect of a particular debt obligation applies only with respect to interest on that obligation and does not require annual renewal. The election under subsection 12(8) may be useful to individuals to enable them to make annual use of the interest, dividend income and capital gains deduction which is discussed in IT-333R2.

22. For taxation years commencing after 1982, subsection 12(10) exempts a taxpayer from the rules imposed by subsection 12(4) with respect to an interest in an investment contract, including a prescribed debt obligation, last acquired before November 13, 1981 provided that

(a) the taxpayer could not, after November 12, 1981 and before the end of the taxation year, require the repayment, acquisition, cancellation or conversion of that interest (other than by reason of a failure or default under the terms or conditions of the contract, i.e. the taxpayer is locked in), and

(b) the maturity date of the contract has not, after November 12, 1981 and before the end of the taxation year, been extended and the terms or conditions relating to payments in respect of that interest have not been changed during that period.

In contrast with the third anniversary rule (see 20 above), which has the effect of exempting taxpayers from the accrual rules until 1987 in respect of pre-1982 debt obligations, subsection 12(10) exempts taxpayers from those rules for the entire term of a debt obligation.

Prescribed Debt Obligation

23. A prescribed debt obligation is any debt obligation the terms of which include one or more of the conditions or which possesses one or more of the characteristics, described in subsection 7000(1) of the Income Tax Regulations. Where a taxpayer has an interest in a prescribed debt obligation, any bonus or premium payable thereunder shall, by virtue of subsection 7000(3) thereof, be considered to be an amount of interest payable under the obligation and an amount of interest will, by virtue of and as calculated by subsection 7000(2) of the said Regulations, be deemed to accrue to the taxpayer for each taxation year commencing after 1981 during which the interest in the obligation was held. Interest income deemed to accrue in accordance with section 7000 of the Income Tax Regulations is required to be reported for tax purposes in accordance with subsections 12(3), (4), (8), (11), and 20(21), as the case may be, (see 15, 18, 21, 20 and 24 respectively, herein) and subsection 20(14) which is dealt with in IT-410. For example, in 1983 a taxpayer acquires a guaranteed investment certificate which matures in 1988 and bears interest at 12 per cent per annum, payable at maturity. However, if the taxpayer chooses to redeem the certificate at any time prior to maturity the interest rate is reduced to 7 per cent per annum. Such a guaranteed investment certificate will be a prescribed debt obligation within the meaning of paragraph 7000 (1)(c) of the Income Tax Regulations because the maximum amount of interest that is payable in any year before maturity is less than the maximum amount of interest payable in the year of, and upon, maturity. Consequently, regardless of when a taxpayer has acquired such a certificate, interest income will be deemed to accrue thereon at 12 per cent for each taxation year during which the taxpayer held it. If a taxpayer disposes of such a certificate prior to maturity, over-accrued interest may, in the circumstances described in 24 below, be deducted from the taxpayer's income for the year of disposition.

Deduction for Over-Accrued Interest

24. Applicable to taxation years commencing after 1982, where a taxpayer has accrued and reported interest income on a debt obligation and has at any particular time disposed of the obligation for consideration equal to its fair market value at the time of disposition, the taxpayer may, by virtue of subsection 20(21), deduct in computing income for the year of disposition, the amount, if any, by which the aggregate of the amounts of interest from that debt obligation that was included in the taxpayer's income for the year of disposition and all previous years exceeds the total interest actually received thereon. Where, however, the taxpayer has deducted an amount under paragraph 20(14)(b), in respect of the obligation, the deduction under subsection 20(21) is reduced by this amount.

Canada Savings Bonds

25. As debt obligations of the Government of Canada, Canada Savings Bonds will, if the necessary conditions prevail, be investment contracts (see 19 above) for the purposes of subsection 12(4). For example, where a taxpayer acquired a Compound Interest Canada Savings Bond prior to 1982, included no interest in respect thereof in income and is still holding the bond on January 1, 1985, it will be an investment contract and for purposes of determining its initial third anniversary, it will, by virtue of paragraph 12(11)(b), be deemed to have been issued on December 31, 1984. Accordingly, the provisions of subsection 12(4) will apply on December 31, 1987, the date of the bond's initial third anniversary, and will require the interest that has accrued for the period commencing January 1, 1982 and ending December 31, 1987, to be included in the bondholder's income for 1987 to the extent that it was not otherwise so included for the year or any preceding year. Where interest in respect of any Canada Savings Bond is to be reported on the accrual basis, either annually under subsection 12(8) or on every third anniversary under subsection 12(4), it may be reported either on a bond year basis (i.e. October 31 to November 1) or on a calendar year basis. Taxpayers who acquire Canada Savings Bonds after 1982 may use the annual accrual basis to report interest income with respect thereto only where an election to do so is made in accordance with subsection 12(8) (see 21 above). Interest payments on Regular Interest Canada Savings Bonds are reported annually on T5 information slips by the Bank of Canada and are required to be included in the bondholder's income for the applicable year. For this reason, Regular Interest Canada Savings Bonds cannot be investment contracts. The comments in 7 above concerning the method used to report interest income for 1983 and subsequent taxation years with respect to debt obligations acquired before 1983 apply also to Canada Savings Bonds.

26. A Compound Interest Canada Savings Bond that is an investment contract will have its third anniversaries determined pursuant to subsection 12(11) both before maturity and, until redeemed, after maturity. Consequently, where such a bond matures and is not redeemed on or before the third anniversary next following the date it matured, the interest that is payable at maturity will be required to be included in the bondholder's income for the taxation year in which such third anniversary occurs to the extent it was not included in income in prior years.

27. Holders of Canada Savings Bonds dated before November 1, 1977 (series 31 and prior) may be in receipt of cash bonuses that are payable at maturity. Holders of Canada Savings Bonds dated November 1, 1977 to November 1, 1980 (series 32 to 35 inclusive) may acquire entitlement to additional interest computed at a rate that is greater than the rate stipulated on those bonds. When either a cash bonus or an amount of additional interest is received, the recipient thereof has the option of treating all, part or none thereof as interest and the balance of the amount received as a capital gain, whereby only one half of the capital gain portion is brought into income. Since this optional treatment can be selected only for the year in which an amount in respect of either a cash bonus or additional interest is received, individuals reporting interest on the accrual basis who wish to treat any such amount as a capital gain should accrue and report interest only at the rate stipulated on those bonds and report the bonus and additional interest on the cash basis.

General

28. A taxpayer who elects under section 28 to compute income from a farming or a fishing business in accordance with the cash method will be allowed to use that method in respect of interest income directly related to such a business (e.g. interest on unpaid trade receivables). Such a taxpayer is, however, subject to paragraph 12(1)(c) and to the rules in subsections 12(3) to (11) as may be applicable with respect to interest income from all other sources.

29. The following list summarizes provisions of the Act not otherwise referred to in this bulletin that concern interest income with cross-references to any departmental publications that provide details on their application:

Reference to
Income Tax Act    
Interpretation Bulletin
or Information Circular
  Description      

12(1)(c)

Prepaid funeral costs (interest on trust account)

IT-246

15(3)

Interest on income bonds

IT-52R4

17

Imputed interest on certain loans to non-resident persons

20(14)

Transferor's interest income on sale of debt obligation IT-410

70(1)

Interest income of deceased person IT-210R

76

Securities received in satisfaction of income debt IT-77R

80.1(2), (3)

Interest received on property acquired as compensation for foreign property taken over

81(1)(g.1)

Income relating to to (g.3) property acquired as a personal injury award by persons under 21 years of age IT-365R

81(1)(m)

Interest received by Canadian corporations in respect of the disposition of a foreign public utility or public service business

110.1

Interest and dividend income deduction IT-333R2

130.1(2)

Taxable dividends of mortgage investment corporations deemed to be received as interest

137(4.1)

Amounts in respect of shares of credit unions deemed to be interest IT-483

PART XIII

Non-resident withholding tax I.C.77-16R

 

212(1)(b)

General provision and exceptions IT-361

 

IT-155R

 

IT-360R

212(6)

Reduced rate on certain bond interest

212(15)

Status of obligation insured by the Canada Deposit Insurance Corporation

214(2) and

(12)

Interest element of blended payments on capital and income

214(3)(e)

Deemed interest under subsection 130.1(2) (see above)

214(6) to (12)

Deemed payments of interest on transfers of certain obligations from non-residents to residents

214(15)

Certain standby charges and guarantee fees deemed to be interest

218

Rules with respect to interest on certain loans made to a wholly-owned Canadian subsidiary by a foreign parent
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