10 October 1990 Ruling 9006303 F - Deduction Secured Interest

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.

October 10, 1990

Re:  Request for Advance Income Tax Ruling

We are writing in response to your letter of April 27, 1990, in which you have requested an advance income tax ruling. We regret to advise you that we are unable to provide you with the rulings requested for the following reasons:

1.     Revenue Canada, Taxation ("RCT") provides advance income tax rulings in situations where all parties have been identified, written authorizations have been received and supporting documentation is submitted for examination. RCT will also provide advance rulings in respect of public issues of securities made pursuant to a prospectus. Your requests concerned the income tax consequences of proposed transactions to a group of unidentified taxpayers, rather than to a specific taxpayer.

2.     The proposed transactions in your request appear to be identical in character to transactions undertaken in prior years.

Although we are unable to provide you with an advance income tax ruling, we have set out below our general comments on the matters raised in your letter.

Where the simple interest accrued on a loan with a one year term is replaced with a new borrowing having as its principal amount the aggregate of the accrued interest and original funds advanced, it is our view that it is a question of fact whether the accrued interest on the first loan will be considered to be paid on granting the second and subsequent loans. Such a determination can only be made with reference to all the circumstances of each particular case. Where the facts indicate that the interest is paid, the issue of compound interest does not arise. Where the facts indicate that the accrued interest is not paid on granting the second loan, however, the portion of accrued interest on the so-called principal of the second loan that reflects interest on interest will not be deductible until such interest is paid.

Where a borrower has paid a fee in respect of an initial loan, provided that no part of the fee can be construed as compensation for the borrowed money and that the funds are used by the borrower for the purpose of earning non-exempt income from a business or property, the fee would ordinarily meet the criteria for deductibility set out in subparagraph 20(1)(e)(ii) of the Act. Subparagraph 20(1)(e)(v) would not apply to remove the references to the words "the lesser of" contained in paragraph 20(1)(e) and subparagraph 20(1)(e)(iii) because the consideration for which the initial loan is extinguished would include a debt obligation of the taxpayer. Therefore, such fees would only be deductible ratably over a period not exceeding five years.

Fees and interest expense paid pursuant to a borrowing made for the purpose of earning income from property add to the borrower's cumulative net investment loss ("CNIL") defined in subsection 110.6(1). An individual's CNIL is calculated, in part, with reference to investment expenses incurred after 1987. Paragraph (e) of the definition of investment expense requires the individual to include in such expense his loss for the year from property or the renting or leasing of rental property (within the meaning assigned by subsection 1100(14) of the Income Tax Regulations (the "Regulations") or a property described in Class 31 or 32 of Schedule II of the Regulations) owned by him except to the extent included under paragraph (c) of the definition of investment expense. Therefore, assuming that the proceeds of the loan are used to earn income from property and the property produces a loss for tax purposes, the fees and interest would indirectly increase the amount of the individual's CNIL, as such fees would be included in the determination of his loss from property.

The opinions in this letter are provided pursuant to the practice described in paragraph 24 of Information Circular 70-6R.

Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch