22 April 2002 External T.I. 2001-0110455 - INT. EX. TO FUND BROKERAGE CASH ACC.

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Will the withdrawal of an amount of money that does not exceed the accumulated dividend income paid on the shares and deposited in an individual's cash account by an investment brokerage firm preclude the deductibility of the interest paid on the loan used to fund the brokerage cash account (which funds were used to acquire the shares)?

Position TAKEN:

Generally no - the original use and current use remain the same.

Reasons FOR POSITION TAKEN: General application of the law.

XXXXXXXXXX 							2001-011045
P. Diguer

April 22, 2002

Dear XXXXXXXXXX:

Re: Paragraph 20(1)(c) of the Income Tax Act (Canada) (the "Act")

This is in reply to your letter dated November 13, 2001, in which you request our views on the application of the Act in regards to the tracing of the use of borrowed funds where the accumulated dividend income paid on shares (acquired with the borrowed funds) is deposited in an individual's brokerage cash account by an investment brokerage firm and is then withdrawn by the individual.

Briefly, you describe a situation where an individual borrows money from a financial institution (the "Loan") and places the proceeds of the Loan into a brokerage cash account (the "Cash Account") with an investment brokerage firm (the "Broker"). The Broker invests the entire amount in the Cash Account in securities (i.e. shares, etc.) that are traded on the Toronto Stock Exchange. Some of the securities yield dividend income which is received by the Broker and deposited in the individual's Cash Account. At regular intervals, the individual withdraws an amount of money that does not exceed the accumulated dividend income deposited by the Broker in the individual's Cash Account (the "Withdrawal").

You ask:

Will the Withdrawals reduce the amount of the interest paid or payable on the Loan that would be deductible pursuant to subparagraph 20(1)(c)(i) of the Act?

Our comments

The situation that is described in your letter appears to involve a series of actual completed transactions involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R4 dated January 29, 2001. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which we hope are of assistance to you.

Interest on borrowed funds is deductible for purposes of the Act if it meets all the requirements of paragraph 20(1)(c) of the Act. Paragraph 20(1)(c) of the Act provides notably that the money must have been borrowed for the purpose of gaining or producing income from a business or property. It is the current use made of the borrowed funds in a particular year rather than the initial use of the funds which must be considered in determining whether the interest paid or payable with respect to the borrowed funds is deductible in the particular year. In order to determine whether borrowed funds have been put to an eligible use, it is necessary to determine the current use of the original borrowed funds.

Generally, interest paid by an individual on a loan used to fund a brokerage cash account with an investment brokerage firm is deductible if those funds are subsequently invested in shares provided that the interest paid satisfies all the conditions in paragraph 20(1)(c) of the Act. Where borrowed funds have been put to an eligible use and the interest on the borrowed funds meets all the requirements of paragraph 20(1)(c) of the Act and the current use of the borrowed money remains unchanged (i.e. none of the property originally acquired with the borrowed money is disposed of) interest on the borrowed funds will continue to be deductible for purposes of paragraph 20(1)(c) of the Act. The fact that the income earned by the investments is withdrawn from the account is not relevant to determining the current use of the borrowed money.

We trust our comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch