2014-0534641E5 Deductibility of interest

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

Section: 20(1)(c)

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                                                                                                                                                   2014-053464
                                                                                                                                                   Christina Teow

October 29, 2014

Dear XXXXXXXXXX:

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.

Our comments

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.

Yours truly,

 

G. Moore
For Director
Partnerships and Corporate Financing Section
International Division
Legislative Policy and Regulatory Affairs Branch

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