2020-0860981C6 2020 - Q11 Refinancing Prescribed Rate Loans

Principal Issues: 1. Whether the attribution rules will apply to the securities that are still owned and were purchased with Loan 1; 2. Whether the attribution rules will apply to the investments purchased with Loan 2?

Position: 1. No; 2. No.

Reasons: Based on technical requirements.

Author: Thomas, Allison
Section: 74.1(1), 74.1(3), 74.2(1), 74.5(2)

2020 CRA Roundtable – October 27, 2020

QUESTION 11: Refinancing Prescribed Rate Loans and the Attribution Rules

An individual (other than a trust) has a prescribed rate loan at 2% for $100,000 (“Loan 1”). The borrowed money was used to purchase securities for $100,000. The securities now have a value of $200,000. The individual wants to refinance the loan at 1%. The individual wishes to sell half the securities and use the proceeds to repay the loan. The individual would then borrow $100,000 at the prescribed rate of 1% (“Loan 2”). The proceeds of Loan 2 will be used to purchase new securities for $100,000. Can the CRA confirm that the attribution rules will not apply to the securities that are still owned and were purchased with Loan 1? Can the CRA confirm that the attribution rules will not apply to the investments purchased with Loan 2?

CRA Response

In respect of the repayment of Loan 1, as stated in paragraph 22 of IT-511R - Interspousal and Certain Other Transfers and Loans of Property, “If property has been acquired with a loan that satisfied the requirements of subsection 74.5(2) and the loan is repaid, neither subsection 74.1(1) nor 74.2(1) will apply after the repayment to income earned on the property or capital gains arising on the disposition of the property.”

In respect of Loan 2, the proceeds of that prescribed rate loan are used to purchase new investments. Subsection 74.5(2), which provides an exemption from the attribution rules contained in subsection 74.1(1) and section 74.2, could apply with respect to Loan 2 if all the conditions stated therein are satisfied.

Moreover, subsection 74.1(3), which inter alia ensures that the attribution rules will continue to apply where a new loan is used to repay an existing loan that was used to acquire property, would not technically apply in this situation as the proceeds from Loan 2 are not used to repay Loan 1.

Allison Thomas
(613) 670-1475
October 27, 2020
2020-086098

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, 2021

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 redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, 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, 2021