CRA confirms that a 1% prescribed-rate loan can effectively replace a 2% loan if the latter loan is repaid with sales proceeds

An individual, who used a loan ("Loan 1") bearing interest at the prescribed rate (2%) to purchase securities for $100,000, now wishes to refinance the loan at 1%. Accordingly, half the securities (which have doubled in value) are sold for $100,000, which is used to repay Loan 1, and $100,000 is borrowed at the new prescribed rate of 1% ("Loan 2") to purchase new investments.

CRA confirmed that the attribution rules in ss. 74.1 and 74.2 will cease to apply after the repayment of Loan 1, and that the s. 74.5(2) exception from the attribution rules could apply to Loan 2 if the usual conditions were met.

S. 74.1(3) - which CRA described as ensuring that the attribution rules continue to apply where a new loan is used, e.g., to repay an existing loan that was used to acquire property - would not “technically” apply, because the proceeds from Loan 2 were not used to repay Loan 1.

Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.11 under s. 74.1(3).