19 October 2004 External T.I. 2004-0097431E5 - Reverse mortgage; income property (not annuity)

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 payable on reverse mortage is deductible where funds are used to purchase income property that is not an annuity

Position: Maybe

Reasons: Depends on whether criteria in 20(1)(c) are satisfied

				2004-009743
XXXXXXXXXX 								Denise Dalphy, LL.B.
(613) 941-1722
October 19, 2004

Dear XXXXXXXXXX:

Re: Reverse Mortgage

We are writing in reply to your letter of October 7, 2004 wherein you requested an opinion on the deductibility of simple interest accrued in respect of a taxation year on a reverse mortgage where the money borrowed under the mortgage is used to acquire income-producing property (such as debt obligations, shares of corporations, units of mutual fund trusts, other trust units, or a combination of the foregoing) other than an annuity.

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 general nature.

Under a reverse mortgage plan arrangement, a homeowner can use his or her mortgage-free or low-mortgage house as security to receive cash or an income-producing property. Such arrangements are capable of being structured in a variety of ways. We also understand that in many reverse mortgage plans, the principal and accrued interest on the funds made available to a homeowner in respect of a reverse mortgage would become due and payable only when the homeowner died or the house was sold.

The facts of each arrangement would have to be known before it could be ascertained whether simple interest accrued in respect of a taxation year on a reverse mortgage is deductible. While money borrowed (under the security of a mortgage) that is used to acquire income-producing property may fall within the ambit of subparagraph 20(1)(c)(i) of the Income Tax Act (the "Act"), in order to make a determination for income tax purposes, it would be necessary to review the relevant legal documents, with a view to deciding whether the funds made available to the homeowner in connection with the reverse mortgage is "borrowed money", and what the purpose of the use of the borrowed money was. In addition, while subparagraph 20(1)(c)(i) of the Act provides for a deduction relating to borrowed money used for the purpose of earning income from certain properties, the deductibility of any related losses may be affected by the Media Release and draft legislation issued by the Department of Finance on October 31, 2003. 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