Appendix A: The Time Value of Money

• Author: Vern Krishna
• Profession: Professor of Common Law, University of Ottawa Barrister at Law
• Pages: 612-620

612

APPEN DIX A

The TIme vaLue

ofmoney

The fundamental purpose of income tax law is to collect taxe s for gov-

ernment expenditures. A taxpayer’s obligation for tax ar ises when he

or she earns tax able income. The obligation to pay the tax, however, is

determined by a schedule set out in the Act. Thus, the timing of tax

payments is key to the eff‌icient collection of revenue.

Time has value. The value is the effect of time on invested money.

We can look at value from two dimensions: future and present.

Given a sum of money, we can determine its value at some future date

if we know the interest rate at which we will invest the money. Con-

versely, if we know that we are to receive a sum of money in the future,

we can determine its value today if we know the rate at which it is, or

can be, invested. Thus, money has “time value.”

All assets, t angible and intangible, can be expressed in ter ms of

their future or present value if we can deter mine the rate at which the

asset is invested or discounted. The appropriate rate is usually the mar-

ket-determi ned interest or investment rate.

In economic terms, “interest” is the rent al cost of borrowing money.

The cost of renting money may be f‌ixed in advance, determin able at a

future time, or variable according to sp ecif‌ied conditions. Thus, inter-

est and time are inext ricably related. An interest rate is relevant if, and

only if, it is specif‌ied in relation to time.

The concept of the time value of money is relevant to all economic

transactions. L awyers deal w ith assets th at have a “time value” in virtu-

ally all areas of commerci al practice. For example, suppose that a plain-