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Email this5:09 pm
December 12, 2009
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Hi everyone,
I've got a challenge for any of you that want to look this up, as I've spent a couple hours on the telephone with both Canada Revenue Agency and Coast Capital Savings Federal Credit Union on the matter.
Problem: I took out a 19-month non-redeemable GIC with then Coast Capital Savings Credit Union in the amount of $20,000. In February 2018, I really wanted to redeem it early, without any interest paid to me, so I could put it into a 4.00% 40-month convertible GIC, so the branch agreed to redeem it. They, did, however, show the interest as being paid to me and then created a debit memo from my bank account, debiting me for the full amount of the interest I wasn't to receive. I didn't think anything of it, but definitely did not think that accrued interest that I wasn't to receive would be included in my T5. However, it was.
I've raised the issue with Coast Capital Savings Federal Credit Union, who checked with their back-office team, who then escalated it to the Operations team that handles registered plans (it's a non-registered GIC, though, but I guess that team handles such reporting). They've referenced an internal company policy that believes their reporting this accurately; however, the Member Service Representatives do see my point that I believe this to be either (a) incorrect or (b) one of two possible correct ways of handling things.
When I spoke with Canada Revenue Agency today, the agent could not locate a specific section of the Income Tax Act or a clear, convincing interpretation bulletin or policy guidance of some kind that specifies how this should be handled. I explained that when I worked for HSBC Bank Canada, when a client would be permitted to redeem a non-redeemable term deposit early, we would tell the client the amount of accrued interest that they are forfeiting and, to the best of my recollection, the bank did not report this interest on their T5 (and rightly so, since it was never paid to them). Also, when you think about it, it's interest income the bank or credit union is retaining...they should pay the tax on said income, not the client.
Help me to show Coast that their interpretation, while well-intentioned, is incorrect. It seems most unlikely to me that Tangerine Bank, Bank of Nova Scotia, and HSBC Bank Canada are doing this incorrectly and Coast is doing it correctly. 😉
To be clear, as I'm going to Langara College right now, my income will be below the basic personal exemption so I won't be paying any tax on this interest, but it's the principle and something that's being done incorrect should be corrected.
Many thanks,
Doug
5:31 pm
April 6, 2013
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Tangerine Bank, Bank of Nova Scotia, and HSBC Bank Canada are different from Coast. But, they are all correct.
My previous posting Tax treatment of GIC interest penalties deals with such situations.
The way that Coast treated the situation leads to an Income Tax Act subsection 20(21) deduction.
5:42 pm
December 12, 2009
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Thanks, Norman, I did note that section in the screenshot you shared in the linked forum thread (from the T5 Guide for Reporting Investment Guide, I believe). So, it sounds like my suspicion that both methods are correct, but can you refer me to a specific section of the Income Tax Act or some other guidance document that I can show to Coast that the method the other FIs use is correct? It seems to me this is likely due to how their banking system handles term deposit early redemptions, which is unfortunate.
My preference would be for them to either:
- amend my T5 for the amount less $77.67 (it seems like they'd be legally permitted to do so, since this is the current tax year); or,
- refund me the $77.67 in accrued interest (i.e., waive the interest penalty), which would require no amendment to my T5
At the end of the day, I feel like, even if the branch staff don't disclose the taxation of this accrued but withheld interest upfront, their GIC redemption notice should note this, and give me the option to cancel this redemption or ask for the penalty to be waived.
Cheers,
Doug
6:28 pm
April 6, 2013
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I think that it is just general taxation.
If the GIC issuer just cancels the accrued interest, then nothing needs to be reported on a T5 slip. It sounds like that's what Tangerine Bank, Bank of Nova Scotia, and HSBC Bank Canada do.
If the GIC issuer pays the accrued interest out and then claws it back, then the paid out interest does need to be reported on a T5 slip. Unfortunately, that sounds like what Coast did. The principal and accrued interest was paid out to your bank account. The interest paid was then clawed back.
6:40 pm
December 12, 2009
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Norman1 said
I think that it is just general taxation.If the GIC issuer just cancels the accrued interest, then nothing needs to be reported on a T5 slip. It sounds like that's what Tangerine Bank, Bank of Nova Scotia, and HSBC Bank Canada do.
If the GIC issuer pays the accrued interest out and then claws it back, then the paid out interest does need to be reported on a T5 slip. Unfortunately, that sounds like what Coast did. The principal and accrued interest was paid out to your bank account. The interest paid was then clawed back.
Right, but can you find me something from CRA that shows me BNS, Tangerine Bank, HSBC, et al., are justified in reporting the way they do?
At any rate, Coast would still be within their rights (would not be illegal) to amend the current year T5. That'd be preference because (a) it's unclear where you would claim this deduction (suppose carrying charges, interest, and other expenses) and (b) this would likely prompt an enquiry from the CRA that is totally unnecessary. I don't think it's too much to ask them to amend the slip, or to waive the interest penalty (thus no amended slip being necessary) and reimburse me the clawed back interest.
Cheers,
Doug
7:44 pm
April 6, 2013
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Unfortunately, I can't locate anything from CRA specific to cancelled interest.
I think it is just understood that interest that is not received and that is not deemed to be received is just not reportable.
11:13 pm
October 21, 2013
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I can't solve this either, but I have 3 thoughts.
Definitely, you should not be taxable on income that was never received and could not, by any definition, have been received. It was a GIC with interest paid out or compounded annually, I presume; and the one-year mark had not yet been reached ( or anywhere close if I remember that 4% promo correctly). I presume they did not convert it first to a daily interest account and give you interest on that basis retroactively. That's the only excuse I could see for calling it taxable interest.
So,
1. When you were cashing in the GIC, was there any "paper trail" to show that you would be cashing it in and receiving no interest? If they told you at any point that you would receive no interest (which they surely must have - the only question is whether this can be documented), then no income, period.
2. Since this is a matter of principle more than dollars, you can and should escalate the problem all the way up to the Ombudsman for Banking or whatever it's called, if you can. You have time to wait for them to go through the motions. The goal would be to get CC to correct their practices, which I think is what you are after. Seems to me it's a bookkeeping issue, and one they don't encounter very often and may not have thought through properly. Don't tell them it has no impact on your tax liability; let them think it matters materially.
3. The problem sort of reminds me of some principles that seem to be in effect regarding HST. I can't recall the exact circumstances, but sometimes merchants seem to have the right to tax you on an amount higher than what you actually paid out due to some understanding of sales or discounts or whatever. I've never understood this. The point is only that numbers aren't always what they seem, apparently.
Being a veteran of the banking industry, I imagine you've thought of pretty well every possible approach.
If Norman can't find anything in the Income Tax Act, then I'm sure it doesn't exist. Is there anything in any banking legislation, regs or agreements that would relate?
I think Norman's last assessment, #6, is probably correct.
12:27 am
October 29, 2017
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If the deposit and subsequent withdrawal of that interest shows on the account, I would simply report the same amount as lost income. Which is exactly what happened. The CRA can then contact CC and give them hell. Send a copy of your statement to CRA. If there is no statement to prove the transactions, then it doesn’t exist and it’s a fraudulent tax slip. If it can’t be proved it, never happened and therefore can’t be legally reported as haven happened.
show me da money!
12:41 am
October 21, 2013
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Is there a space on the form for "lost income"? There are losses for businesses and capital gains/losses, but I don't know where you'd put this kind of a loss.
12:58 am
October 29, 2017
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Lol, it’s negative income. That’s the kicker. If you pencil in a negative income source it cancels out the tax receipt from CC. If the CRA doesn’t like that, they can call CC to find out why your so called income was taken. It will look very obvious and it’s completely backed and provable. Your job as Joe citizen is to report all income and that was negative income.
1:13 am
October 29, 2017
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If you want to just go with formality, I suppose claiming the interest amount as a deduction will do. It’s legit since CC withdrew the money.
1:27 am
October 21, 2013
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A deduction, as in 'cost of borrowing for investment purposes' or something like that?
That could raise algorithmic eyebrows and lead to some q's form CRA, I suppose. That's an argument that could go on for a long time.
I know someone who got asked for documents last year even though, with or without documents, he would not owe any tax. No brain involved - the opposite of "no brainer".
English is a tricky language - as Doug and I have noticed before... lol
7:23 am
April 6, 2013
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It would be a subsection 20(21) deduction.
Haven't done a 20(21), deduction myself. I would guess it would be either Line 232 (Other deductions) or Line 221 (Carrying charges).
Line 232 is where StudioTax puts other sibling section 20 deductions: subsection 20(11) and subsection 20(12).
Line 221 is where CRA instructs one to claim repaid interest on tax refunds:
If the CRA paid you interest on an income tax refund, report the interest in the year you received it on line 121 of your return. If the CRA then reassessed your return and you repaid any of the refund interest in 2018, you can claim on line 221 of your return the amount of interest you repaid, up to the amount you had included in your income.
7:30 am
April 6, 2013
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Loonie said
I can't solve this either, but I have 3 thoughts.Definitely, you should not be taxable on income that was never received and could not, by any definition, have been received. It was a GIC with interest paid out or compounded annually, I presume; and the one-year mark had not yet been reached ( or anywhere close if I remember that 4% promo correctly). I presume they did not convert it first to a daily interest account and give you interest on that basis retroactively. That's the only excuse I could see for calling it taxable interest.
…
Unfortunately, in this case, the accrued interest was received instead of cancelled.
When Coast redeemed the GIC early, both principal and accrued interest were credited to Doug's bank account. Coast then "created a debit memo from my bank account, debiting me for the full amount of the interest I wasn't to receive."
7:37 am
April 6, 2013
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Loonie said
…
3. The problem sort of reminds me of some principles that seem to be in effect regarding HST. I can't recall the exact circumstances, but sometimes merchants seem to have the right to tax you on an amount higher than what you actually paid out due to some understanding of sales or discounts or whatever. I've never understood this. The point is only that numbers aren't always what they seem, apparently.…
That's the store discount versus manufacturer coupon issue.
A store discount is consider a reduction in shelf price. So, HST is charged on the reduced price.
A manufacturer coupon is considered to be consumer rebate and not a reduction in shelf price. So, HST is charged on the original shelf price.
8:07 am
December 12, 2009
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Loonie said
I can't solve this either, but I have 3 thoughts.
Definitely, you should not be taxable on income that was never received and could not, by any definition, have been received.
I agree - it matters not whether interest ran through my chequing account and was immediately debited out (automatically or by manual debit entry). 
It was a GIC with interest paid out or compounded annually, I presume; and the one-year mark had not yet been reached ( or anywhere close if I remember that 4% promo correctly). I presume they did not convert it first to a daily interest account and give you interest on that basis retroactively. That's the only excuse I could see for calling it taxable interest.
I agree, if I had already "received," by way of compounding interest, or had been paid annually interest and subsequently permitted to redeem the term deposit/GIC prior to maturity, then I can potentially see them reporting the interest paid gross of penalties on my T5. However, in my case, I hadn't received any interest, paid annually or compounded, as I was only ~2 months into a 19-month term.
1. When you were cashing in the GIC, was there any "paper trail" to show that you would be cashing it in and receiving no interest? If they told you at any point that you would receive no interest (which they surely must have - the only question is whether this can be documented), then no income, period.
I'd have to check my e-mail, but in fact, they were reluctant to even let me redeem it. It was me who suggested paying me no interest (emphasis added) in exchange for letting me redeem early. I'd prefer not to have to divulge these e-mail messages, though, as I don't want to get the branch in trouble. I get excellent service from the branch and want to maintain a positive relationship, hence why I'm going through the Contact Centre.
2. Since this is a matter of principle more than dollars, you can and should escalate the problem all the way up to the Ombudsman for Banking or whatever it's called, if you can. You have time to wait for them to go through the motions. The goal would be to get CC to correct their practices, which I think is what you are after. Seems to me it's a bookkeeping issue, and one they don't encounter very often and may not have thought through properly. Don't tell them it has no impact on your tax liability; let them think it matters materially.
Incidentally, now that Coast is federally regulated, I now have options vis-a-vis OBSI and/or FCAC. Provincially regulated credit unions have little to no consumer protection oversight.
Ultimately, I'd prefer to resolve this issue at the Contact Centre level, but if it's a policy problem, I may have to guess at the CEO's e-mail address and e-mail the CEO. If I still get no satisfaction at that level, then absolutely, I would escalate Coast's Ombudsman* (*if they've appointed one yet) and/or OBSI.
3. The problem sort of reminds me of some principles that seem to be in effect regarding HST. I can't recall the exact circumstances, but sometimes merchants seem to have the right to tax you on an amount higher than what you actually paid out due to some understanding of sales or discounts or whatever. I've never understood this. The point is only that numbers aren't always what they seem, apparently.
Interesting analogy. Crude, but apt, and I get it. 
Being a veteran of the banking industry, I imagine you've thought of pretty well every possible approach.
If Norman can't find anything in the Income Tax Act, then I'm sure it doesn't exist.
True...that surprises me. Norman's pretty astute with finding something. Even CRA agents (I spoke to two or three) couldn't locate anything. They've escalated it to a senior-level team member to research, but I think they'll suggest the same things Norman has.
Is there anything in any banking legislation, regs or agreements that would relate?
I think Norman's last assessment, #6, is probably correct.
Not that I'm aware of...as far as I know, HSBC was operating properly in terms of withholding interest and not reporting that withheld interest.
It's one thing to pay a penalty in foregone interest...it's quite enough to be taxed on interest that you did not receive!
Cheers,
Doug
8:11 am
December 12, 2009
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Loonie said
Is there a space on the form for "lost income"? There are losses for businesses and capital gains/losses, but I don't know where you'd put this kind of a loss.
Yeah, I thought maybe "carrying charges, interest expenses, and other expenses," but would that result in a dollar-for-dollar deduction from the incorrectly reported $77.67 on my T5 slip such that it reports the net amount (net of the deducted interest) in my line 121 - interest income?
Vatox said Lol, it’s negative income. That’s the kicker. If you pencil in a negative income source it cancels out the tax receipt from CC. If the CRA doesn’t like that, they can call CC to find out why your so called income was taken. It will look very obvious and it’s completely backed and provable. Your job as Joe citizen is to report all income and that was negative income.
Good point! I just suspect CRA will delay processing of my Notice of Assessment and want clarification. I'd prefer things to be processed very cleanly.
This makes me wonder if it's a Coast Capital Savings-specific problem, or one shared by other companies that use the same core banking system (Temeno, from Celero Systems) as Coast, like Motive Financial and Canadian Western Bank?
Cheers,
Doug
8:26 am
February 17, 2013
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You managed to to get CC to redeem a GIC early? How you do that...hold the branch managers wife hostage?
8:28 am
December 12, 2009
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Norman1 said
Unfortunately, in this case, the accrued interest was received instead of cancelled.
When Coast redeemed the GIC early, both principal and accrued interest were credited to Doug's bank account. Coast then "created a debit memo from my bank account, debiting me for the full amount of the interest I wasn't to receive."
But that's semantics, really. It's accrued interest that I never received. The fact it went in and out of my bank account immediately (Figure 1) should be immaterial. Effectively, at best, I'm being asked to pay the tax on the interest income (revenue) Coast is retaining and thus not paying tax on. At worst, both I and Coast are paying tax on the same dollars of income (double taxation). 😉
Figure 1: Snippet of March 2018 transactions to Doug's Coast chequing account
NB The larger term deposit was a 40-month convertible GIC that was at 2.5% which I converted to a 40-month 4.0% GIC. Incidentally, Coast originally didn't want to let me convert that to another convertible GIC, but I argued their terms didn't specify specifically that you couldn't convert a convertible GIC to another convertible GIC. They agreed to the conversion, albeit with that persuasive nudging, provided that that counts as my one-time conversion option and I said, "yes, of course." So I can technically only convert the smaller GIC now, which seems unlikely there will be a higher rate than 4.0% before December 2020.
Figure 2: Snippet of March 2018 transactions early redeemed Coast GIC of Doug
Cheers,
Doug
P.S. Peter, when you edit a post with uploaded images, Simple:Press removes the added alt and title text for the image. I've had to re-add these to my Figure 1 twice now. Can you fix this bug, or escalate it to Simple:Press to correct expeditiously? It also converts my ' to " in the title and alt text variables, which causes problems. Simple:Press' way of handling images is very stupid! Why won't you just convert to Vanilla, bbPress, or even phpBB? It's a really non-standard, relatively obscure BB system. 🙁
8:39 am
October 29, 2017
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It’s simply a CC mistake where the interest never should have been deposited.
If you don’t want to ruffle feathers, then just file with the tax slip as is and you are all good because you are below the personal exemption.
You said you wanted to do something about this based on principle, yet you don’t want to get the branch in trouble. It appears that there isn’t a way to get both. Questions may be asked if you try to deduct it, so pick one.
Please write your comments in the forum.