23 December 2009 External T.I. 2009-0341951E5 F - Déductibilité des frais d'emprunt

Principal Issues: [TaxInterpretations translation] In the context of a mortgage loan used to acquire investments that generate different types of property income, are expenses incurred as a result of the requirements of a financial institution that are incidental to an application for a loan, deductible pursuant to paragraph 20(1)(e)?

Position: Yes.

Reasons: Text of the Act.

									2009-034195
XXXXXXXXXX 							Catherine Ayotte,
	 			Notary, M.Fisc.
December 23, 2009

Dear Sir,

Subject: Deductibility of certain expenses as part of an investment plan

This is further to your email of September 22, 2009, and our telephone conversation (Ayotte/XXXXXXXXXXXXXX) of December 2, 2009, in which you asked for more information on the above subject.

Please note that unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").

It appears to us that the situation described in your letter may constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should provide all relevant facts and documentation to the appropriate Tax Services Office for its views. However, we are prepared to provide the following general comments.

Your Question

In the context of a mortgage used to acquire investments that generate different types of property income, are certain costs incurred as an incident of a financial institution's requirements resulting from an application for a mortgage loan, deductible by virtue of paragraph 20(1)(e)?

Our Comments

In order for an outlay or expense to be deductible pursuant to subparagraph 20(1)(e)(ii), the outlay or expense (other than an "excluded amount") must be incurred in the taxation year or a preceding taxation year and must have been incurred in connection with the borrowing of money that the taxpayer uses to earn income from a business or property. An "excluded amount" includes:

• an amount paid or payable as or on account of the principal amount of a debt obligation or interest in respect of a debt obligation,
• an amount that is contingent or dependent on the use of, or production from, property, or
• an amount that is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation.

Consequently, all costs that are incidental to an application for a loan and that are incurred as a result of the lender's requirements may be deductible by virtue of subparagraph 20(1)(e)(ii) if the other conditions of paragraph 20(1)(e) are satisfied. In our view, notary fees incurred to provide the lender with security that satisfies the lender's requirements are deductible by virtue of paragraph 20(1)(e).

In addition, as provided by that paragraph, such expenses are generally deductible over a period of five years, at a rate of 20% per year, beginning in the year in which the expenses are incurred. For more information on this subject, see paragraph 4 of Interpretation Bulletin IT-341R4 "Expenses of Issuing or Selling Shares, Units in a Trust, Interests in a Partnership or Syndicate and Expenses of Borrowing Money" which is available on the Canada Revenue Agency's website at http://www.cra-arc.gc.ca/E/pub/tp/it341r4/it-341r4-f.pdf .

We hope that our comments are of assistance.

Best regards,

Ghislain Martineau
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.