15 July 1987 Income Tax Severed Letter 5-3424 - [870715]

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.

XXXX

P. Langevin (613) 957-2138

July 15, 1987

XXXX

This is in reply to your letter dated May 17, 1987 wherein you have asked for our comments concerning the rationale for allowing a deduction in respect of a portion of mortgage interest paid for office space in the home of a self-employed individual while disallowing the same deduction in respect of a commission salesman. In our reply we shall assume that the commission salesman receives all of his income from employment as opposed to receiving some part of it from sales as an independent businessman.

Interpretation Bulletin IT-352 (" IT-352 ") at paragraph 4, states that a commission sales employee entitled to claim expenses under paragraph 8(1)(f) of the Income Tax Act (the "Act") may claim in addition to such expenses, an appropriate portion of taxes and insurance paid on his home, but not mortgage interest and capital cost allowance in respect of that home. Pursuant to subsection 8(2) of the Act, expenses which are not specifically provided for by section 8 of the Act may not be deducted in computing income from employment and the latter section makes no provision for the deductibility of mortgage interest paid for office space in the home.

In contrast, paragraph 18(1)(a) of the Act provides for a general limitation in respect of the deduction of outlays or expenses from business or property except to the extent that such outlays or expenses were incurred for the purpose of gaining or producing income from business or property. Paragraph 20(1)(c) of the Act then provides specifically for a deduction in respect of a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property.

It has been decided by the Courts that in the absence of an express statutory allowance, as is provided by paragraph 20(1)(c) of the Act, interest payable on capital indebtedness would be regarded as a non-deductible payment on account of capital. (Vide: Canada Safeway v. M.N.R., 1957, CTC, 335; The Queen v, Bronfman Trust, 1987, DTC, 5064). Inasmuch as only those specific amounts provided by section 8 of the Act are deductible to an employee pursuant to subsection 8(2), and paragraph 8(1)(f)(v) of the Act does not allow a payment on account of capital except as provided in paragraph 8(1)(j) of the Act, interest incurred in respect of money borrowed on a mortgage is not deductible in computing the employment income of an employee who is a commission salesman. Accordingly, the Department's position as stated at paragraph 4 of IT-352 is in keeping with the clear distinction made by the Act and jurisprudence between expenses incurred for the purpose of earning income from a business as contrasted with those related to the earning of employment income.

Yours truly,

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