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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Deductibility of Interest
We are writing in response to your letter of May 21, 1993, to the Charlottetown District Office, in which you requested Revenue Canada's comments with respect to the deductibility of interest pursuant to 20(1)(c) of the Income Tax Act (the" Act").
Specifically, you are concerned with the situation where borrowed funds are used to acquire "personal" assets and to make an "investment" in mutual funds.
In our view, the taxpayer would be able to deduct the portion of the interest expense which relates to the portion of the debt used to earn income from the mutual fund, provided the amount of interest is reasonable in the circumstances. For this purpose, income does not include capital gains.
It is our opinion that any repayment of the principal portion of a debt obligation reduces both the "investment" portion and the "personal" portion of the debt.
Where the source of the investment income is disposed of, the interest on that portion of the borrowed money which remains outstanding would cease to be deductible.
Normal dividends received, whether in the form of a taxable dividend or a capital gains dividend, should not affect the deductibility of the interest expense incurred on the borrowing in respect of the investment, provided the investor continues to hold the investment.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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