18 July 1995 Internal T.I. 9508157 - LOSS OF SOURCE

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:

1)interest paid to honour a guarantee after company is insolvent deductible ?

2)interest paid by shareholder to pay corporate monthly payments deductible?

Position TAKEN:

1)NO
2)No

Reasons FOR POSITION TAKEN:

1) company is insolvent - see 7-950646, March 24, 1995
2) different taxpayers

			July 18, 1995

Saint John Tax Services Headquarters
Client Services C. Tremblay
(613) 957-2744
Attention: Anne Blanchard
950815

Deductibility of Interest Expense

We are writing in response to your memorandum of March 21, 1995, requesting our views regarding the deductibility of

(1)interest paid by an individual on a loan made to honour a guarantee of a Canadian Controlled Private Corporation and

(2)interest paid by him in making the monthly payments on the company's original loan.

When a taxpayer borrows money with interest to make a payment to honour a guarantee he has given to cover the loans of a corporation of which he is a shareholder, the interest paid is deductible pursuant to paragraph 20(1)(c) if all the conditions in paragraph 9 of IT-445 have been satisfied. However, pursuant to paragraph 4 of the IT, the interest is not deductible if the corporation ceases operations. In the case at hand, the corporation is insolvent, and has ceased operations; accordingly, the interest paid on the loan would not be deductible.

Section 20.1 of the Act applies when a taxpayer who used borrowed money to earn income from a business or property ceases to use it to earn income following a loss of source of income. The provision ensures that interest on such borrowed money will, in certain circumstances, continue to be deductible under paragraph 20(1)(c) of the Act. In the first situation you describe, the money borrowed by the taxpayer to honour his guarantee has not been borrowed to be used to earn income from a business or from a property because the corporation is insolvent at the time and has ceased to carry on a business. In the second situation, the taxpayer making the monthly payments is not the same as the taxpayer who has borrowed the money; the shareholder making the payments on the corporate loan has not used borrowed money. In our view, there is simply a debtor-creditor relationship.

Accordingly, the interest paid is not deductible in the situations described.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch