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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether the interest expense on the assumption of a mortgage in satisfaction of an inter-company debt would be deductible..
Position: General Comments.
Reasons: Question of fact and not enough information provided.
XXXXXXXXXX 2000-000020
B. Kerr
Attention: XXXXXXXXXX
February 23, 2000
Dear Sirs:
Re: Assumption of Mortgage
This is in response to your letter of December 22, 1999, wherein you requested our views on whether the interest expense on the assumption of a mortgage in satisfaction of an inter company debt would be deductible under the provisions of subsection 20(3) of the Income Tax Act (the "Act").
You described a situation where ACO and BCO are owned by the same group of shareholders. ACO runs an active business and BCO holds commercial real estate. ACO took out a bank loan secured by a mortgage for working capital purposes. ACO built a building for BCO and a portion of the sale price was charged to a non-interest bearing inter company account. ACO wants to reduce the amount outstanding from BCO by having BCO assume the mortgage which is interest bearing.
The situation outlined in your letter involves an actual fact situation relating to a proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular IC-70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.
Generally, where a taxpayer uses borrowed money to pay an amount payable for property acquired for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business as described in subparagraph 20(1)(c)(ii) of the Act, the borrowed money is deemed, under subsection 20(3) of the Act, to have been used to acquire the property in respect of which the original amount was payable.
In order to meet the requirements of subsection 20(3) and subparagraph 20(1)(c)(i), a taxpayer must have used borrowed money to repay money previously borrowed. This would not encompass a situation where existing debt is assumed in satisfaction of an obligation to repay money previously borrowed. However in a situation where a taxpayer purchases a property from another taxpayer and assumes that taxpayers mortgage liability in respect of the property, it is our view that the interest on the mortgage would be deductible by the taxpayer under subparagraph 20(1)(c)(ii) (interest on an amount payable for property acquired) and there would be no need to rely upon subsection 20(3) of the Act.
We trust that these comments will be of assistance.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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