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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether deemed interest under 80.5 on a refinanced loan whereunder the source of income disappears continues to be deductible under 20(1)(c)
Position TAKEN:
yes
Reasons FOR POSITION TAKEN:
Under 20(3), the refinanced loan is deemed to be used for the same purpose as the original loan for purposes of 20.1 and 20(1)(c). Under 20.1, the balance of the original loan is deemed to be used for the purposes of earning income from property. It would appear that the deemed interest will continue to be deductible, notwithstanding the loss of source of income.
942208
XXXXXXXXXX F. Francis
Attention: XXXXXXXXXX
December 8, 1994
Dear Sirs:
Re: Borrowed money used to earn investment income
This is in reply to your letter of August 25, 1994, wherein you requested our interpretation of the application of section 20.1 of the Income Tax Act (the "Act") to a particular factual situation.
As noted in Information Circular 70-6R2, we do not give opinions with respect to proposed factual situations other than as a reply to an advance income tax ruling request. However, we will offer the following general comments.
Section 20.1 of the Act contains rules that apply where, because of a loss of source of income, borrowed money ceases to be used for an income-earning purpose. The rules ensure that interest on such borrowed money will, in certain circumstances, continue to be deductible under paragraph 20(1)(c) of the Act. Where an amount is deemed, by virtue of section 80.5 of the Act, to be interest paid in respect of a year pursuant to a legal obligation to pay interest on borrowed money for purposes of paragraph 20(1)(c) of the Act, and the source of income subsequently disappears, and the loan is refinanced, subsection 20(3) and section 20.1 of the Act should be applicable. Consequently, we are of the view that the deemed interest on the portion of the borrowed money that has been lost should be deductible.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation
Branch
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