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.
HALIFAX DISTRICT OFFICE HEAD OFFICE M. Chiasson Financial Industries Technical Advisor Division
Deduction of Interest on Pre-1981 RRSP Loans
This is in reply to memorandum of September 21, 1993 and our subsequent telephone conversation (Chiasson/Harding) concerning the deduction of interest on loans taken out to fund contributions to RRSPs.
Interest paid on loans used to finance contributions to an annuitant's own RRSP are deductible from income in accordance with the provisions of paragraph 20(1)(c) of the Income Tax Act (the "Act"). However, Paragraph 18(11)(b) was enacted to deny this deduction in respect of any indebtedness incurred to pay contributions to an RRSP after November 12, 1981.
In the situation at hand, an annuitant of an RRSP took out a loan in the 1970's for the purpose of financing his contributions to the RRSP. Accordingly, interest on the loan was deductible as provided by paragraph 20(1)(c) of the Act as it read at the time and continued to be deductible in each subsequent year because the funds borrowed were used to make an RRSP contribution prior to November 12, 1981.
The loan in question was, however, refinanced after November 12, 1981 and you wish to determine if the interest on the refinanced loan can now be denied.
As noted above, paragraph 18(11) denies any interest on any loan used to finance contributions made to an RRSP after November 12, 1981. However, the purpose of the second loan was not to contribute money to an RRSP but was to refinance the original loan. Accordingly, paragraph 18(11) can not be applied to prevent the deduction of the interest on the loan.
The wording "Notwithstanding any other provision of this Act" as used in the preamble to subsection 18(11) does not alter this outcome since the money used under the refinancing was never used to make a contribution to an RRSP at any time after November 12 1981. In particular this means that the deeming provision of subsection 20(3) of the Act will continue to apply and the money borrowed under the refinancing will still be deemed to have been used for the same purpose for which the original loan was used. In this case subsection 20(3) will continue to deem the loan was used to pay a premium to an RRSP prior to November 12 1981.
During our telephone conversation you noted that the subject loan only requires the annual payment of interest and no payment on account of capital. You advised that this structure is often chosen to allow the continued deduction of interest for tax purposes while concurrently allowing for the application of larger principal payments to loans where the interest is not deductible. In effect this allows the substitution of deductible interest for the non-deductible interest that would usually be incurred if normal commercial lending practices were followed. In our opinion, if there is evidence that a loan agreement was altered or entered into to obtain this tax advantage, application of the general anti avoidance provisions of the Act may be warranted and you may wish to discuss this further with your tax avoidance section.
for DirectorFinancial Industries DivisionRulings Directorate
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