27 March 1986 Income Tax Severed Letter 5-0261 - [860327]

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.

R. Langevin (613) 957-2138

March 27, 1986

Dear XXXX

This is in reply to your letter of December 12, 1985 regarding the deductibility of certain expenses incurred in the following circumstances.

You have indicated that you propose to borrow a sum of money to be invested in Investment Funds. You expect that the funds in question will provide both dividend income and capital gains.

To finance the acquisition of the above investments, you intend to borrow the required money by placing a mortgage on your personal home. You have requested our confirmation that each of the following category of expense would be deductible for the purposes of income tax:

a) interest paid on money borrowed; b) appraisal fee on house; c) legal fees for preparation and registration of mortgage documents; d) acquisition charge levied on the purchase of the investment funds.

A deduction for interest paid is provided under paragraph 20(1)(c) of the Income Tax Act (the "Act"). That paragraph allows a deduction for an amount paid in the year or payable in respect of the year pursuant to a legal obligation to pay interest on borrowed money provided that it can be demonstrated that the funds are used for the purpose of earning money from a business or property. It is our view that there must also be a reasonable prospect of earning income and that the property in question must not be acquired solely for the purpose of capital appreciation. Accordingly, interest incurred on a debt to acquire shares on which dividends may be paid is deductible, whereas interest incurred on that portion of a debt incurred to acquire property for the purpose of capital appreciation would not be deductible.

In respect of the appraisal fee on your house and legal fees for the preparation and registration of the mortgage documentation, we advise that paragraph 20(1)(e) of the Act provides that where a taxpayer incurs expenses in the course of borrowing money, such expenses will be deductible to the extent that the borrowed money is used by the taxpayer for the purpose of earning income in a business carried on by the taxpayer or from property the income from which is not exempt. It should be noted that where money is borrowed partly for a purpose that qualifies under paragraph 20(1)(e) of the Act and partly for some other purpose, only that part of the expenses that may reasonably be considered applicable to the qualified purpose is deductible. Accordingly, the appraisal fee, legal fees and registration fees would be deductible to the extent permitted by paragraph 20(1)(e) of the Act as indicated above.

Inasmuch as we are not certain of the exact nature of the "acquisition fee" that you have referred to, we cannot provide a definitive reply, however, we would note that legal and accounting fees incurred by a taxpayer in connection with the purchase or sale of shares held by a taxpayer as capital property are included as a component of the adjusted cost base (i.e. cost amount) of the shares or deducted from the sale proceeds as disposal costs, as applicable.

We trust this information has been helpful.

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch