2 February 1995 Internal T.I. 9430557 - INTEREST ON MONEY BORROWED TO PAY 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.

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:

Interest on money borrowed to pay interest

Position TAKEN:

Deductible provided individual borrows to finance an income earning debt and situation he finds himself in is bona fide.

Reasons FOR POSITION TAKEN:

Decision Summary from 1984 and views from Finance.

		February 2, 1995

	HALIFAX DISTRICT OFFICE	HEAD OFFICE
			Rulings Directorate
	Attention:  Dale Evanson	C. Tremblay
	              Acting Chief of Appeals	(613) 957-8953

			943055

Interest on Money borrowed to Pay Interest

We are writing in response to a memorandum by M. Chiasson of November 30, 1994, requesting our views on the interest deduction in the fact situation described below.

Facts

An individual borrows funds from a bank at a commercial rate of simple interest and uses the funds to buy common shares of a corporation which is also his employer. The individual cannot pay the interest payments on the loan and borrows against a personal line of credit and uses those funds to make the interest payments on the loan. The bank also charges interest on the line of credit and the individual seeks a deduction for the accrued interest payable on the secondary borrowing.

Our Comments

Our position, as established in 1984, is that, provided the reason for the predicament in which the individual finds himself is bona-fide and not part of a series of transactions that give the individual an undue tax advantage, is to allow a deduction for the interest paid or payable (depending upon the method regularly followed by the taxpayer in computing the taxpayer's income) on the secondary borrowing under paragraph 20(1)(c) of the Act, where the original borrowing was used either in the day to day business activities of the taxpayer or was used to acquire a property.

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch

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