12 January 2004 External T.I. 2003-0027445 - INTEREST MARGIN ACCOUNT

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether interest paid on margin account is deductible

Position: Depends on the use of the money

Reasons: ITA

		2003-002744
XXXXXXXXXX 	Denise Dalphy, LL.B.
(613) 941-1722
January 12, 2004

Dear XXXXXXXXXX:

Re: Interest Deductibility

We are writing in reply to your letter dated June 5, 2003 wherein you requested our views as to whether interest paid on a margin account at a brokerage house is generally deductible for income tax purposes.

Our Comments

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are seriously proposed in the near future and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. In particular it would appear, based on the details provided in your submission, that your transactions are partially completed or completed, and that your relevant Tax Services Office should address these issues. Notwithstanding the foregoing, we are providing the following comments.

In order for interest to be deductible as an expense the borrowed money must be used for the purpose of earning income from a business or property. In determining what borrowed money has been used for, the onus is on the taxpayer to trace or link the borrowed money to a specific eligible use. For example, if you borrow against your margin account to buy a personal item, the interest paid will not be deductible. If, however, you use the money to purchase common shares, the interest paid would generally be deductible. Interpretation Bulletin IT-533 ("IT-533"), Interest Deductibility and Related Issues, dated October 31, 2003 describes some of the requirements in order for interest to be deductible. We have enclosed a copy of IT-533 for your reference.

We also wish to advise you that, on October 31, 2003, the Department of Finance released for public comment draft proposals regarding the deductibility of interest and other expenses for income tax purposes. The proposals include 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. We have enclosed a copy of this News Release.

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 CCRA. 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

Encl.