My_question_is: Canadian-specific question: I invested a large sum of cash with one of Canada's five large banks. These GICs were taken on 1, 2,3, and 4 year terms. In the third year I MADE A LARGE PURCHASE AND WAS REQUIRED TO REDEEM THE GICs EARLY AT THE 2.5 YEAR POINT. The bank then claimed back all of the interest paid out for the third year which was approx. $7000. They had already issued T4 tax slips for this for interest paid out in that year and refused to issue a statement of interest retraction. I contacted revenue canada about this interest clarification and they said all I needed was a declaration on bank letterhead signed off by an officer of the bank that the $7000 was in fact redeemed to them. However they now SAY IT WAS NOT A RETRACTION OF INTEREST BUT IN FACT A PENALTY FOR EARLY CONTRACTUAL REDEMPTION. Revenue Canada says that as such I would still have to pay the tax on the interest as the bank sees the process as a penalty rather than a retraction of interest. So what it amounts to is I hav e to pay tax on money I don't have and the bank gets to write this amount off against their capital losses on our term agreement. How can this be that I have to pay income tax on money the bank has and they don't? Help please, sincerely, XXXX XXXXXXXX. ---------------------------------------------------------------------------
david ingram replies:
This is determined by the terms of the contract.
If the bank had already paid you the interest during the year, that would be taxable.
If you redeemed and they took a penalty of 5 or 6 or 7% it is what it is and you have a penalty which is a capital loss and can be claimed on schedule 3 but is only usable against capital gains. As such, you can claim it in the current year, carry it back three years on form T1A or carry it forward indefinitely.
You only get half of it but you do get some.
However, I will bet that with interest rates what they have been, you received more interest over-all by taking a four year term and redeeming than you would have received if you had only bought all of it in 1 year terms.
It may be, that you would have been better off to borrow the money for your purchase by using the GIC for security.
I don't know.
If you were in the US, you could claim $1,500 or $3,000 per year of the capital loss against other income depending upon your marital status. However, Canada has not allowed its taxpayers to use capital losses against income other than capital gains since 1985.
I am not sure what you mean when you say that the bank can write something off here. The bank only has taxable income with no deductions in this situation.
I had another one recently where a person had loaned $100,000 out as a second mortgage at 11% a year and did not get any interest for 4 years. When he finally received a payout after the person who owed him the money had gone bankrupt, he only received back $35,000 which was all taxed as interest by the CRA. The CRA was right of course. The contract (to protect the rights of the person who had loaned him the money) said that any payments received would be credited to interest first. When my client received the $35,000 it was all he got from a debt that was now over $140,000. Therefore the whole $35,000 'had' to be interest because there was $40,000+ of accrued interest owing.
A similar thing can happen when you owe the bank a lot of money for a business or personal loan and you manage to negotiate a payout of less money than you owe. Technically, the forgiven debt is a taxable capital gain. With this happening millions of times in the USA, the IRS has passed special legislation exempting this situation from tax for some time. Canada has yet to follow suit.
Hope this makes you feel a little better even if it not the answer you were hoping for.
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