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.
Dear Sirs:
Re: Cost of a Personal Use Property
This in reply to your letter dated December 7, 1990 requesting our opinion with respect to the cost of a real property held for personal use. Specifically, you asked why property taxes and mortgage interest could not be added to the adjusted cost base of such a property.
Generally, it is our view that outlays such as mortgage interest and property taxes are, in the absence of statutory authority, current rather than capital outlays. In determining whether or not an outlay in respect of interest or property taxes is deductible, the Act requires the taxpayer to first consider paragraphs 18(1)(a), (b) or (h), paragraph 20(1)(c), and lastly subsection 18(2).
Paragraph 18(1)(a) of theIncome Tax Act(the “Act”) sets out the following conditions to be met in determining the deductibility of an expenditure:
• expense or outlay must
- (a) be made or incurred by the taxpayer for the purpose of gaining, producing or maintaining income, and
- (b) be expected to generate income related to the taxpayer's business or property.
The expenditures you have described do not meet this general principle of having been made for the purpose of gaining, producing, or maintaining income. In addition to failing this test, paragraph 18(1)(h) prohibits the deduction of personal or living expenses as defined in subsection 248(1). All expenses incurred with property held for personal use are disallowed under paragraph 18(1)(h).
Where a taxpayer can establish that borrowed funds were used by him for the purpose of earning income from the property, paragraph 20(1)(c) would apply to allow a the deduction of interest. As personal use property is not used for the purpose of earning income, paragraph 20(1)(c) would have no application. Subsection 18(2) provides an exception to paragraph 20(1)(c) whereby interest and property tax expenses incurred in connection with undeveloped land are only deductible to the extent of revenue produced from that land unless
- (a) the land is used in the course of a business or
- (b) the land is held for the purpose of producing income in the year.
Expenses in excess of revenue in such cases may be added to the cost of the land by virtue of paragraph 53(1)(h) of the Act. The amount of interest or property taxes paid or payable cannot be added to the ACB of the property under paragraph 53(1)(h) if they are not deductible by virtue of a provision other than subsection 18(2) of the Act. As a result of the operation of these provisions of the Act, mortgage interest and property taxes cannot be added to the cost of a real property held for personal use.
I trust these comments will be of assistance to you.
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© Her Majesty the Queen in Right of Canada, 1991
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© Sa Majesté la Reine du Chef du Canada, 1991
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