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 for income tax purposes in the situation described.
Position: No.
Reasons: In order for interest to be deductible the funds must be used for the purpose of gaining or producing income from a business or property. In this case the direct use of the borrowed funds is the purchase of a personal residence.
XXXXXXXXXX
2012-044393
Andrea Boyle, CGA
July 30, 2012
Dear XXXXXXXXXX:
Re: Deductibility of Interest Expense
I am writing in reply to your letter dated April 11, 2012 in which you have asked whether interest expense on a mortgage is deductible for income tax purposes.
You invested the proceeds from the sale of your principal residence in an investment fund. You subsequently purchased a condominium, obtaining mortgage financing for the purchase on the basis of the income from the investment fund. You are asking whether the interest expense on the mortgage is deductible under such circumstances.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (“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.
Interpretation Bulletin IT-533 Interest Deductibility and Related Issues, (available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it533/README.html) discusses the CRA's interpretations of the deductibility of interest expense under various provisions of the Act and the judgments in numerous court decisions involving the deductibility of interest expense. The courts have determined that it is generally the direct use to which the borrowed money is applied which governs whether the interest is deductible for tax purposes.
In the situation which you have described, it seems that the borrowed money was used to purchase a condominium as a personal residence. Therefore, the borrowed money was not used for the direct purpose of earning income from a business or property and the interest expense would not be deductible for income tax purposes.
We trust that these comments will be of assistance.
Yours truly,
Doug Watson
for Director
Corporate Financing Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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