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: Will interest on a line of credit be deductible against revenues where a sole proprietor co-mingles sales revenues with personal funds and utilises the co-mingled funds to pay down a personal mortgage while a line of credit is solely utilised for payment of the proprietorship's business expenses?
Position: Yes
Reasons: Cash damming as discussed in IT-533, paragraph 16.
2006-021824
XXXXXXXXXX L. Carruthers, CA
613-957-2060
August 14, 2007
Dear XXXXXXXXXX:
Re: Interest Deductibility - Cash Damming
This is in reply to your letter of December 15, 2006, and our telephone conversation of August 10, 2007, wherein you asked our assistance to clarify the interest deduction that would be allowed on a line of credit based on the example that follows:
A sole proprietor co-mingles sales revenues with personal funds and utilises the co-mingled funds to pay down a personal mortgage while a line of credit is solely utilised for payment of the proprietorship's business expenses.
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 of an advance income tax ruling request submitted in a manner set out in Information Circular 70-6R5. (This Information Circular and the Interpretation Bulletin referred to below can be accessed on the internet at http://www.cra-arc.gc.ca.) As stated in paragraph 22 of Information Circular 70-6R5, written opinions are not advance tax rulings and, accordingly, are not binding on the Canada Revenue Agency (the "CRA"). The following comments are, therefore, of a general nature only.
Paragraph 20(1)(c) of the Income Tax Act (the "Act") governs the deductibility of interest expense for income tax purposes and, for purposes of your example, generally, limits the deduction to interest on borrowed money which is used for the purpose of earning income from a business or from property. Interpretation Bulletin IT-533, entitled Interest Deductibility and Related Issues, discusses the CRA's interpretations of the deductibility of interest expense under various provisions of the Act and the judgments in numerous court decisions involving the deductibility of interest expense. The courts (as commented on in IT-533) have determined that it is the direct use to which the borrowed money is applied which governs whether the interest is deductible for tax purposes.
In our view, the cash damming techniques discussed in paragraph 16 of IT-533 include the scenario you described and would serve to ensure that borrowed monies are used for specific, and presumably, eligible uses. The CRA accepts that cash damming is consistent with the wording of paragraph 20(1)(c) as well as court decisions and serves to facilitate the tracing/linking process.
We trust our comments are of assistance.
Yours truly,
R.A. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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 prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
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, 2007
Email this Content