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: Does interest on borrowed money used to purchase securities continue to be deductible if securities are later settled on an inter vivos discretionary trust.
Position: Yes
Reasons: Subsection 75(2) flows the property income source to the settlor.
XXXXXXXXXX 2000-005227
N. L. Storry
July 8, 2002
Dear XXXXXXXXXX:
Re: Paragraph 20(1)(c) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your correspondence of October 17, 2000 wherein you requested our opinion regarding the deductibility of interest in a hypothetical situation. We apologize for the long delay in responding to your letter.
You describe a situation where an individual borrows money from a bank and subscribes for fully participating common shares of a Taxable Canadian Corporation carrying on an active business in Canada. The individual (the "settlor") later settles the shares on an inter vivos discretionary trust, of which he is one of two trustees, but not a beneficiary. The trust requires trustee unanimity for making decisions. At all relevant times, the settlor pays a reasonable rate of interest to the bank on the money borrowed and remains a trustee. In your letter you refer to documents #9717815 and #9514275 wherein any income or loss from the shares would be attributed to the settlor pursuant to subsection 75(2) of the Income Tax Act.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5 dated May 17, 2002. Therefore, the following comments are of a general nature only.
On the assumption that interest on borrowed money used to purchase certain securities is initially deductible, you have asked whether interest expense continues to be deductible by the settlor after the securities are settled on an inter vivos discretionary trust.
Generally, 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 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.
Subsection 75(2) of the Act applies to deem any income or loss, or any taxable capital gain or allowable capital loss of the trust to be that of the settlor. In this regard, although the settlor no longer owns the securities, any income or loss from such property will be attributed to the settlor under subsection 75(2) of the Act. It is our opinion that subsection 75(2) of the Act flows the property income source to the settlor. Therefore, for purposes of paragraph 20(1)(c) of the Act, the current use of the borrowed money is considered to be for the purpose of gaining or producing income from property. As such, a deduction for interest expense would therefore be acceptable.
We are currently in the process of reviewing our existing positions on interest deductibility subsequent to the recent decisions of the Supreme Court of Canada on interest deductibility. You may wish to contact us subsequent to the completion of our study this fall to confirm our position at that time.
We trust these comments will be of assistance.
Yours truly,
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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