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: Can an individual deduct interest paid on a mortgage on his principal residence against the rental income earned on a mortgage-free rental property?
Position: No, it is the current and direct use of borrowed funds that is the test to be applied in determining the deductibility of interest.
Reasons: The current and direct use of the borrowed funds in this circumstance is to purchase a principal residence. Accordingly, the borrowed funds have not been used to earn income from a business or property and therefore the interest thereon is not deductible pursuant to subsection 20(1)(c).
XXXXXXXXXX 2006-020462
M. Thomson
August 21, 2007
Dear XXXXXXXXXX
Re: Deductibility of interest
This is in response to your letter dated September 5, 2006 concerning deductibility of the interest expense on your principal residence mortgage against the rental income from your rental property. You have asked for an administrative concession should the interest not be deductible.
Written confirmation of the tax implications 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 entitled Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax service office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). Unless otherwise stated, all statutory references are to the Act.
Subparagraph 20(1)(c)(i) permits the deduction of an amount paid in the year or payable in respect of the year, pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property. In general, the test to be applied for the use of borrowed money is the direct use of the borrowed money and it must be done giving effect to the legal relationships. Furthermore, the relevant use is the current use and not the original use of the borrowed money. In determining the current use of the borrowed money, taxpayers must establish a link between the money that was borrowed and its current use. See Interpretation Bulletin IT-533 paragraphs 13 through 18 for further information.
In the circumstances you describe, the use of the borrowed funds was to purchase a principal residence, a personal asset, and therefore the direct use of the borrowed funds, giving effect to the legal relationships, is non-eligible. Accordingly, the mortgage loan is not used for the purpose of earning income from a business or property and the interest thereon is not deductible for tax purposes.
It should be noted that there are no administrative concessions with respect to interest deductibility. However, in some situations, taxpayers may restructure borrowings and the ownership of assets to meet the direct use test. See IT-533 paragraph 15 for further information.
We trust our comments will be of some assistance to you.
Yours truly,
R.A. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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