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: Whether interest on new loan used to repay old loan is deductible
Position: 20(3) deemed new loan to be used for same purpose of repaid loan
Reasons: 20(3)
2004-009538
XXXXXXXXXX Denise Dalphy, LL.B.
(613) 941-1722
September 29, 2004
Dear XXXXXXXXXX:
Re: Interest Deductibility
We are writing in reply to your e-mail of September 20, 2004 wherein you enquired about interest deductibility. Our understanding of the fact situation is that you obtained a loan, which was secured by a mortgage on your principal residence, and which you used to make a down payment on an income property. You wish to repay the loan that is secured by your principal residence with a new loan, which will be secured by a mortgage on your income property.
Written confirmation of the consequences 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 70-6R5. Nonetheless, we shall provide some comments of a very general nature.
Subsection 20(3) of the Income Tax Act provides, in general terms, that where a taxpayer uses borrowed money to repay money previously borrowed, the borrowed money is considered to be used for the purpose for which the original loan was used. So, if interest paid or payable on the original loan was deductible on the basis that it was used for the purpose of earning income from a business or property, interest on a new loan that was used to repay the original loan will continue to be deductible.
Finally, we wish to bring to your attention that, on October 31, 2003, the Department of Finance released a Media Release, which included draft legislation regarding interest deductibility. The Media Release stated:
"...The proposed legislative amendments and draft interpretation bulletin are aimed at clarifying how the income tax system links the deductibility of certain expenses and losses to a taxpayer's prospects for profit, objectively determined. The proposals include specific Income Tax Act rules that require that there be a "reasonable expectation of profit" from a business or property for a taxpayer to realize a loss from the business or property, and that make clear that profit in this sense does not include capital gains...."
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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