2016-0661001E5 repayment of a loan

Principal Issues: Is an amount incurred on the disposition of a property deductible in computing the capital gain?

Position: Question of fact. Maybe.

Reasons: See below.

Author: Ryer, Andrea
Section: 40(1)(a)(i)

XXXXXXXXXX                                                                                                                    2016-066100
                                                                                                                                            A. Ryer
September 13, 2016

Dear XXXXXXXXXX:

Re: Repayment of Loan

We are writing in response to your e-mail, dated August 5, 2016, in which you asked whether an additional amount paid on the repayment of a loan when a property is sold would be a deductible outlay or expense for the purpose of calculating the taxpayer’s gain or loss from the disposition of that property under the Income Tax Act (the “Act”).

In the circumstances described, the taxpayer received an interest-free, forgivable loan through a provincial program created to assist certain low-income individuals with the purchase of affordable housing (i.e., a home). Under the terms of the loan, the borrower is not required to repay the loan if he or she lives in the home for a specified period of time. However, if the individual ceases residing in the home as a principal residence or if the individual sells the home at a gain before the specified time period, the individual is required to pay both the loan and an additional amount, which is calculated as a percentage of the increase in value of the home (the “Amount”).

In your situation you indicate that the individual moved out of the home before the end of the specified period and began renting it. Despite the terms of the loan, the individual did not repay the loan or the Amount at the time of the change in use. Eventually, the home was sold at a gain, and the individual repaid the loan and paid the Amount. In your view, the Amount may be deductible as a selling cost of the home. In the alternative, you have asked whether the Amount is deductible as interest in computing the individual’s rental income.

Our Comments

This technical interpretation provides general comments about the provisions of 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 a particular transaction 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

It appears that your question relates to completed transactions involving a specific taxpayer. The Directorate cannot confirm the tax treatment of a completed transaction. In addition, the deductibility of a specific expense is primarily a question of fact, which cannot be determined apart from a review of all the relevant circumstances. Nevertheless, we are prepared to offer the following general comments.

Subparagraph 40(1)(a)(i) of the Act provides a deduction, in the computation of a taxpayer’s gain from the disposition of property, of any outlay or expense made or incurred for the purpose of making the disposition. There must be a relatively immediate nexus between the expense and the disposition: case law states that expenses incurred for the purpose of making a disposition are those made “for the immediate or initial purpose of” making the disposition and not the eventual or final goal which the taxpayer may have in mind (Avis Immobilien GMBH v The Queen, 94 DTC 1039). As stated above, whether the Amount, or any portion of it, was incurred for the immediate purpose of selling the property is a question of fact.

In general terms, an amount is considered to be interest where it represents compensation for the use of money, is referable to a principal sum, and accrues day-to-day. It does not appear that the Amount meets these requirements. For more information, please refer to Income Tax Folio S3-F6-C1, Interest Deductibility, which is available at cra-arc.gc.ca.

You may also wish to consider the information in Income Tax Folio S1-F3-C2, Principal Residence, which discusses, among other things, the deemed disposition of a taxpayer’s principal residence when it is completely converted to an income-producing use, such as a rental property.

We trust these comments will be of assistance to you.

Sincerely,

Michael Cooke, CPA, CA
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate

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