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: CALU Question 5.
Scenario 1: A taxpayer borrows money to use in business. To pay interest on the first loan, the taxpayer borrows money under a second loan. Is the interest on the second loan deductible under paragraph 20(1)(c)?
Scenario 2: A taxpayer borrows money to acquire shares of a corporation. To pay interest on the first loan, the taxpayer borrows money under a second loan. Is the interest on the second loan deductible under paragraph 20(1)(c)?
Position: Scenario 1: Yes
Scenario 2: Yes
Reasons: Previous position taken in Rulings interpretation 2004-007034. Also see legal opinion from Justice.
CALU - Conference for Advance Life Underwriting (2005)
Question 5
Deductibility of Interest on Borrowed Money Used to Pay Interest
Scenario 1: A taxpayer borrows money to use in its business. Interest on this loan is fully deductible under paragraph 20(1)(c). To pay all or part of this interest, the taxpayer borrows money under a second loan.
Scenario 2: A taxpayer borrows money which she uses to acquire shares of a corporation. Interest on this loan is fully deductible under paragraph 20(1)(c). To pay all or part of the interest, the taxpayer borrows money under a second loan.
Question:
Is the interest on the second loan in both scenarios deductible under paragraph 20(1)(c)?
Agency's Response
Scenario 1 and 2:
As indicated in Income Tax Rulings document #2004-007034, we are of the view that interest paid or payable in the year (following the method regularly used by a taxpayer in calculating income) on the second loan is deductible in calculating income of a taxpayer from a business or property pursuant to paragraph 20(1)(c) of the Income Tax Act if the interest on the first loan is deductible pursuant to that provision in calculating the income of the taxpayer from that business or property.
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