Prescribed-rate loans or indebtedness generally refer to loans or indebtedness that meet the following statutory requirements to qualify for an exception to certain attribution rules in the Income Tax Act (Canada):
- interest is charged on the loan or indebtedness at a rate equal to or greater than the lesser of:
- the prescribed rate in effect at the time the loan was made or the indebtedness arose (as set out in paragraph 4301(c) of the Income Tax Regulations); and
- the rate that would, having regard to all the circumstances, have been agreed on, at the time the loan was made or the indebtedness arose, between parties dealing at arm’s length;
- the amount of interest that was payable in respect of the particular year was paid not later than 30 days after the end of the particular year; and
- the amount of interest that was payable in respect of each taxation year preceding the particular year was paid not later than 30 days after the end of each such taxation year.
Pursuant to the second condition, accrued interest in respect of 2019 must be paid by January 30, 2020. In the Canada Revenue Agency’s view, this requirement is not met where a debtor issues a promissory note to the creditor in the amount of the accrued interest, even if the promissory note is irrevocable, unrestricted and payable on demand (CRA doc 2018-0761551C6). In other circumstances though (such as a payment of a dividend), it is accepted that the delivery of a promissory note constitutes payment, subject to the relevant facts – the most important of which is the intention of the maker of the note as determined by the evidence (Banner Pharmacaps NRO Ltd. v. The Queen, 2003 FCA 367). Although the CRA’s views do not carry the weight of law, their positions should be considered in assessing audit risk.
The third condition provides that interest must have similarly been paid for all preceding taxation years. Missing an interest payment for a year would taint the loan or indebtedness for all subsequent years.