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.
1992 Canadian Tax Foundation Conference
Deductibility of Interest
Question 8
In ATR-41, the Department states that interest on a loan used to acquire preferred shares that are convertible into common shares is fully deductible even though the dividend rate is lower than the interest rate, so long as the shareholder and the issuer are dealing at arm's length and there are no restrictions on the right of conversion.
Would the Department apply the same reasoning and permit a person to fully deduct the interest on a loan used to acquire warrants that can be exercised to purchase common shares?
Answer 8
Assuming the person is not in the business of buying and selling warrants, interest on borrowed money used to acquire the warrants would not be deductible. This would be so, notwithstanding that the sale of the warrants could yield a capital gain, since there would be no source of income from the warrants, as required by subparagraph 20(1)(c)(i) of the Act.
We are not prepared to consider any changes to our present administrative positions for interest deductibility.
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