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: 1. Whether the attribution rules will apply to the securities that are still owned and were purchased with Loan 1; 2. Whether the attribution rules will apply to the investments purchased with Loan 2?
Position: 1. No; 2. No.
Reasons: Based on technical requirements.
2020 CRA Roundtable – October 27, 2020
QUESTION 11: Refinancing Prescribed Rate Loans and the Attribution Rules
An individual (other than a trust) has a prescribed rate loan at 2% for $100,000 (“Loan 1”). The borrowed money was used to purchase securities for $100,000. The securities now have a value of $200,000. The individual wants to refinance the loan at 1%. The individual wishes to sell half the securities and use the proceeds to repay the loan. The individual would then borrow $100,000 at the prescribed rate of 1% (“Loan 2”). The proceeds of Loan 2 will be used to purchase new securities for $100,000. Can the CRA confirm that the attribution rules will not apply to the securities that are still owned and were purchased with Loan 1? Can the CRA confirm that the attribution rules will not apply to the investments purchased with Loan 2?
CRA Response
In respect of the repayment of Loan 1, as stated in paragraph 22 of IT-511R - Interspousal and Certain Other Transfers and Loans of Property, “If property has been acquired with a loan that satisfied the requirements of subsection 74.5(2) and the loan is repaid, neither subsection 74.1(1) nor 74.2(1) will apply after the repayment to income earned on the property or capital gains arising on the disposition of the property.”
In respect of Loan 2, the proceeds of that prescribed rate loan are used to purchase new investments. Subsection 74.5(2), which provides an exemption from the attribution rules contained in subsection 74.1(1) and section 74.2, could apply with respect to Loan 2 if all the conditions stated therein are satisfied.
Moreover, subsection 74.1(3), which inter alia ensures that the attribution rules will continue to apply where a new loan is used to repay an existing loan that was used to acquire property, would not technically apply in this situation as the proceeds from Loan 2 are not used to repay Loan 1.
Allison Thomas
(613) 670-1475
October 27, 2020
2020-086098
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