26 June 1990 Ministerial Correspondence 59704 F - Interest Deductibility

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.

June 26, 1990

19(1)

Re:  Interest Deductibility

We are writing in response to your letter which we received on March 8, 1990 in which you requested our views concerning the deductibility of interest on funds borrowed to cover cash rental losses in a case where a rental property is heavily financed.

You stated that you are of the view that the interest expense associated with borrowings used to acquire such a property would be fully deductible.  You enquired as to the deductibility of interest on additional borrowings used to fund a cash rental loss on a property in these circumstances.

Although we are unable to comment on proposed transactions, other than in response to a request for an advance income tax ruling, we have set out below our general comments on the interest deductibility issue you have raised.

Paragraph 20(1)(c) of the Income Tax Act (the "Act") establishes that in order for an amount of interest on borrowed money to be deductible, there must be a legal obligation to pay the amount and the money must have been borrowed for the purpose of gaining or producing income from a business or property.  It is a question of fact whether the circumstances of a particular case involving the rental of a property would support a conclusion that there was a reasonable expectation of income from the property.  In a case where a reasonable expectation of income from a rental property cannot be demonstrated, the interest which contribute to a loss from the rental of such property would not be deductible as the purpose test in paragraph 20(1)(c) would not be satisfied.  Where there is a lack of expectation of income from a rental property, it is our opinion that the interest associated with further borrowings used to fund a cash rental loss would similarly not be deductible under paragraph 29(1)(c) of the Act.

The opinions expressed in this letter are provided in accordance with the practice described in paragraph 24 of Information Circular 70-6R, a copy of which is enclosed.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate