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Interest deductibility under the Canadian Income Tax Act: Meaning of “payable in respect of the year”

In the recent decision of Collins v. The Queen, the Federal Court of Appeal clarifies the meaning of “an amount payable in respect of the year” – one of the requirements for interest deductibility under paragraph 20(1)(c) of the Income Tax Act (the “Act”).  Specifically, in order for interest to be deductible under paragraph 20(1)(c) of the Act, there must be:

(i)   an amount paid or payable in respect of the year

(ii)  pursuant to a legal obligation to pay interest

(iii) on borrowed money used for the purpose of earning income from a business or property

According to the Federal Court of Appeal, “payable in respect of the year” does NOT mean “due in the year”, or “required to be paid in the year”.  Interest is considered “payable in respect of the year” where it is properly accrued in the year, even though the full amount of interest was not required to be paid in the year of accrual, but rather, was required to be paid in a subsequent year.

Collins v. The Queen, reversing an earlier decision by the Tax Court of Canada, represents a good win for the taxpayer.