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 is deductible when borrowed money is used to replace employment income withheld to purchase shares of employer
Position: Depends on direct use of the borrowed money
Reasons: ITA
XXXXXXXXXX
2004-009808
November 5, 2004 Denise Dalphy, LL.B.
(613) 941-1722
Dear XXXXXXXXXX:
Re: Interest Deductibility
We are writing in reply to your letter of October 13, 2004 wherein you requested an opinion on the deductibility of interest paid on a loan, where the borrowed money is used to replace employment income that was withheld by an employer in order to purchase shares of the employer for the employee.
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.
The decisions of the courts have held that, with certain limited exceptions, it is the direct, not the indirect, use of borrowed money that determines whether interest paid or payable on the borrowed money will be deductible for income tax purposes. Where interest is paid on borrowed money that was used to replace employment income that was withheld by an employer in order to purchase shares of the employer for the employee, the direct use of the money would not be the share purchase, but would be whatever the borrowed money was used to purchase. If the borrowed money were used for personal expenditures, the interest paid on the borrowed money would not be deductible. We enclose a copy of Interpretation Bulletin, IT-533, Interest Deductibility and Related Issues, which sets out in detail the rules governing the deductibility of interest for income tax purposes.
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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