28 June 1999 Internal T.I. 9912097 - CARRYING CHARGES

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: Does section 20.1 apply where property disposed of was not a source of income.

Position: No

Reasons: wording of the section

REVENUE CANADA REVENU CANADA

MEMORANDUM NOTE DE SERVICE
DATE June 28, 1999

TO XXXXXXXXXX TSO FROM Income Tax Rulings and
À Tax Avoidance DE Interpretations Directorate
C. Savage
Attention: XXXXXXXXXX (613) 957-2745

FILE 991209
DOSSIER

SUBJECT: : Carrying Charges - Subsection 20.1(1)
OBJET

This is in response to your inquiry of April 29, 1999 regarding the application of subsection 20.1(1) of the Income Tax Act. In the situation you are concerned with, investors acquired what they believed to be interests in a limited partnership. For various reasons, you have determined that the partnership did not exist. The investors were defrauded and received neither income from their investment nor a return of their capital. You propose to allow the investors to claim a capital loss in respect of the disposition of their investments at the time the fraud was discovered.

Some of the investors borrowed money to finance the acquisition of their investment and continue to incur interest in respect of the borrowed money.

You are concerned that by acknowledging that the investors acquired a capital property:

i. you are acknowledging that the investors had a source of income in respect of which they could deduct interest under paragraph 20(1)(c), and

ii. the provisions of subsection 20.1(1) would allow the investors to continue to deduct interest after the disposition of their investments whether or not the investments ever were a source on income.

A capital property is not necessarily a source of income. The definition of capital property in section 54 includes “any property ... any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss ...”. Subsection 39(1) defines the terms “capital gain” and “capital loss” to be a gain or loss from the disposition of any property other than those specifically excluded. There is no requirement that the property be acquired for the purpose of earning income from the property or for the purpose of profiting from an increase in value. Thus, by acknowledging that the investors had a capital property you would not necessarily be acknowledging that they had a source of income in respect of which they could deduct income.

Subsection 20.1(1) can only apply where borrowed money ceases to be used for the purpose of earning income from a capital property and only with respect to borrowed money that was used for the purpose of earning income immediately before that time. If you determine that the investors did not at any time use the borrowed money for the purpose of earning income from their investment, subsection 20.1(1) cannot apply to deem a source to exist. Conversely, if you find that they did use the borrowed money for an eligible purpose subsection 20.1(1) can apply to deem a source to continue to exist after the investment is disposed of.

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

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