Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether interest payments on borrowed money used for the purpose of earning income are deductible under paragraph 20(1)(c)?
Position: Yes, assuming the other requisite tests in the provision are met.
Reasons: Paragraph 20(1)(c) contains an eligible use purpose test and such test must be met
Author: Teow, Christina
October 29, 2014
Re: Interest Deductibility – Direct Eligible Use and Repayment of Borrowed Money
We are writing in reply to your email of June 4, 2014, in which you request our comments regarding the deductibility of interest expense in two scenarios involving money borrowed to purchase shares.
You indicate that in Scenario 1, borrowed money will be deposited in an investment account ($30,000) and used to purchase dividend paying shares ($30,000). In Scenario 2, borrowed money will be deposited in an investment account ($30,000) and a portion will be used to repay some of the borrowed money ($100) and a portion will be used to purchase dividend paying shares ($29,900). You are asking whether interest on the $30,000 will be deductible under paragraph 20(1)(c) in both scenarios.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Paragraph 20(1)(c)(i) of the Act provides a deduction for an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer’s income) pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property, with certain exceptions.
In scenario 1, all of the borrowed money ($30,000) is being used for the purpose of earning income and therefore, interest on this borrowed money would be deductible provided all of the other requirements of paragraph 20(1)(c)(i) are met. In the second scenario, since $100 is repaid, only $29,900 is being used for the purpose of earning income. Therefore, only the interest on the borrowed money of $29,900 would be deductible provided the other requirements of paragraph 20(1)(c) are met.
We trust that our comments will be of assistance.
Partnerships and Corporate Financing Section
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.
© Her Majesty the Queen in Right of Canada, 2014
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2014
For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses, see Video Tax News Monthly Tax Update newsletter.
This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and clients are fully supported and armed for whatever challenges are thrown your way.
Packages start at $399/year.