Does the buyer issue a T5 slip for vendor take-back interest?

When a vendor take-back note carries interest, two questions arise: does the buyer report it to the Canada Revenue Agency (CRA), and does the seller report it on a return? For how the interest is taxed, see how a vendor take-back is taxed.

What the regulation asks of the payer

Section 201(1) of the Income Tax Regulations says that every person who makes a payment to a resident of Canada as or on account of interest of the kinds listed in paragraph (b) shall make an information return in prescribed form. Those kinds include interest in respect of money on loan to an association, corporation, institution, organization, partnership or trust. Paragraph (b) leaves out the portion of interest to which subsections (4) to (4.2) apply; each of those subsections sets its own information-return requirement. The CRA’s T5 page says to use the slip to report the various types of investment income that residents of Canada have to report on their income tax and benefit return. Whether a particular note, and a particular buyer, fall within the listed kinds is a question for the buyer’s accountant.

When the return is due

Section 205(1) of the Regulations says returns required under Part II of the Regulations are filed with the Minister without notice or demand and, unless otherwise specifically provided, on or before the last day of February, for the preceding calendar year. If a person required to file discontinues their business or activity, section 205(2) requires the return within 30 days of the day of the discontinuance.

The seller reports the interest either way

Section 12(1)(c) of the Income Tax Act requires a taxpayer to include in computing income from a business or property any amount received or receivable in the year as, on account of, in lieu of payment of or in satisfaction of interest, depending on the method regularly followed by the taxpayer, to the extent it was not included for an earlier year. The paragraph is subject to subsections 12(3) and 12(4.1) and is written in terms of the interest, not the slip. A missing slip is therefore not the test.

If the seller is a non-resident

The CRA’s T5 page says not to report investment income paid to non-residents of Canada on a T5 slip. Section 212(1) of the Income Tax Act imposes a tax, payable by the non-resident person, on certain interest that a person resident in Canada pays or credits to that person, and section 202(1) of the Regulations requires a person resident in Canada who pays or credits interest to a non-resident person to make an information return. Section 212(1)(b) turns on, among other things, whether the interest is fully exempt interest, whether the payer is not dealing at arm’s length with the recipient, and whether it is participating debt interest, so ask a cross-border tax adviser whether it reaches a given note.