27 April 1998 External T.I. E9808645 - DEDUCTIBILITY OF MORTGAGE 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:

Whether interest on mortgage in respect of a prinicpal residence may be deducted where an inheritance is used to make equity investments instead of paying off the mortgage.

Position:

No.

Reasons:

According to the principles established by the courts, the actual and direct use of money is relevant in determining the deductibility of interest.

XXXXXXXXXX J. Gibbons
5-980864

April 27, 1998

Dear XXXXXXXXXX:

We are replying to your letter of March 28, 1998, in which you inquire whether interest on a mortgage in respect of a principal residence may be deducted.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

In the situation described in your letter, your client will be inheriting a sum of money and instead of paying off the mortgage on her personal residence, she is contemplating using the money to make equity investments. You wish to know whether the interest on her mortgage will be deductible since the purpose of maintaining the original mortgage is to provide funds for making equity investments. Alternatively, your client could pay off the original mortgage, re-mortgage the property, and use the funds to make equity investments. However, in doing it this way, your client would incur additional legal fees.

Generally, interest paid or payable in the year on borrowed money is deductible by virtue of paragraph 20(1)(c) of the Income Tax Act if the borrowed money is used to produce income or to acquire property to produce such income. In this regard, the Supreme Court in the case of The Queen v. Phyllis Bronfman Trust, 87 DTC 5059, ruled that the actual and direct use of the borrowed money is relevant in determining the deductibility of interest. This principle was the basis of the Federal Court of Appeal decision in The Queen v. Said Mohammad Attaie, 90 DTC 6413, the facts of which are very similar to that of your client. Mr. Attaie had received a sum of money from his native Iran, and, instead of paying off the mortgage on his personal residence, used the funds to invest in term deposits, whose interest rate exceeded that of his mortgage. In its decision, the Federal Court of Appeal ruled that the borrowed funds were used to finance a personal residence. Accordingly, the Court upheld the Minister’s assessment denying the deduction of mortgage interest.

From the above, it is our view that any mortgage interest incurred by your client in her particular circumstances is not deductible for income tax purposes.

We trust that these comments will be of assistance.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

- 2 -