Table of Contents

Subsection 18(2) - Limit on certain interest and property tax


Jobin v. Canada (Attorney General), 2005 DTC 5405, 2004 FCA 386

The Tax Court Judge did not commit a reviewable error when he found that s. 18(2) prohibited the deduction of interest and property taxes claimed by the taxpayer, as they related to lands held in her inventory that had not been sold.

Urbandale Realty Corp Ltd. v. The Queen, 97 DTC 5353 (FCTD)

Subsection 18(2) only limited deductions otherwise available and did not establish that property taxes that the taxpayer was unable to deduct under section 9 due to the application of the matching principle, were deductible.

Dubé J. found that a tax is a levy that is "(1) enforceable by law; (2) imposed under the authority of a legislature; (3) imposed by a public body and (4) for a public purpose". (p. 5357)

Words and Phrases

Heinze v. The Queen, 97 DTC 5219 (FCTD)

The taxpayer acquired farmland and buildings for $130,000 and rented the farm out at $2,500 per year with the intention that they would not farm the land until after a mortgage on the farm for $80,000 was paid off in approximately three years' time. S.20(2) applied to deny the deduction of interest and property taxes on the property given that they were not in the farming business in the relevant years.

Ward v. The Queen, 88 DTC 6212, [1988] 1 CTC 336 (FCTD)

Interest and taxes were non-deductible under the pre-1978 version of the provision both because the land in question was held for ultimate subdivision or development, and because land held as an adventure in the nature of trade is not held in connection with carrying on a business.

Administrative Policy

20 February 2013 External T.I. 2012-0469811E5 F - Interest deductibility

The taxpayer acquired a large tract of land on income account using borrowed money and, after subdivision, sold a portion of the lots in Year 2. In response to a query as to whether the taxpayer could deduct all of the interest incurred in Year 2 on the basis that the debt related to a single large tract of land, CRA quoted its position at the 1989 Corporate Management Tax Conference Round Table, Q. 13, referred to 5-8343 and to Q. 39 at the 1991 annual CTF Round Table, stated that the position in these pronouncements was still valid, and added (TaxIntepretations translation):

…the revenues derived from the sale of the…lots cannot be considered other than gross revenues derived from one or the other of the respective plots of land for purposes of paragraph 18(2)(e). It follows that the total of the interest expense for Year 2 must be capitalized to the cost of the totality of the lots whether sold or unsold (subject to the provisions of paragraph 18(2)(f)) in accordance with an allocation which is reasonable in the circumstances….[T]he expenses subject to the subsection 18(2) restriction generally are calculated on a parcel by parcel basis.

4 April 1997 Memorandum 963881

Where the owner of a motel purchases a city-owned lot adjacent to the motel property in an effort to prevent it from being developed in a manner which would be detrimental to the motel business, that lot (if kept vacant) would not be considered to be used in the business of the owner of the motel.

7 February 1992 T.I. (Tax Window, No. 16, p. 19, ¶1738)

The carrying charges that relate to a particular parcel can only be deducted in arriving at the net income from that parcel and cannot be applied to other parcels.

A principal business corporation does not have a base level deduction for each parcel of land it owns, but only a single deduction.

91 C.R. - Q.39

Revenues that relate to a particular parcel of land may only be included in computing the net income from that parcel and not applied to the income from any other parcel of land.

13 June 1991 T.I. (Tax Window, No. 4, p. 29, ¶1303)

Because s. 18(2)(f) does not apply to a partnership of two corporations, interest and property taxes to which s. 18(2) applies are not deductible by the partnership because it has no base level deduction, and they are not deductible by the partners because the expenses are those of the partnership.

5 February 1990 T.I. (July 1990 Access Letter, ¶1314)

A corporation whose principal business is the holding of a more-than-10% interest in a principal-business partnership generally will be regarded as carrying on a principal business for purposes of s. 18(2)(f) and generally will be entitled to claim the base level deduction even though the land is owned by the partnership rather than by the corporation.

1 December 1989 T.I. (May 1990 Access Letter, ¶1209)

Expenses that relate to a particular lot can only be deducted from the net income from that lot and not against the net income of any other lots of the taxpayer; unabsorbed expenses must be added to the cost of the lot.

89 C.R. - Q.46

The acquisition of land includes the addition of services. Therefore, interest on funds borrowed to acquire the services is interest on debt relating to the acquisition of land and is subject to s. 18(2).

89 C.M.TC - Q.11

partnerships are not entitled to the base level deduction.

89 C.M.TC - Q.12

a corporate co-tenant having a taxation year that differs from the fiscal year of the co-tenancy should calculate its base level deduction for purposes of s. 18(2) based upon its own fiscal year-end.

89 C.M.TC - Q.13

the reference in s. 18(2)(e) to "gross revenue, if any, from the land" does not include revenue from sales of individual parcels of a large tract of land. The expenses that relate to a particular part or parcel of land can only be deducted from the net income from that land and not from the net income from any other land the taxpayer may own.

89 C.M.TC - Q.14

where funds borrowed to acquire land cannot be related to particular parcels, the denied deduction generally is allocated to all land held during the year in proportion to the borrowing related to each parcel.

IT-153R3 "Land Developers - Subdivision and Development Costs and Carrying Charges on Land"


Bourgeois, "Some Tax Considerations in Real Estate Development and Construction: Soft Costs, Capitalization, Inventory Write-Downs and Characterization of Partnership Income", 1995 Corporate Management Tax Conference Report, c. 4.

Subsection 18(3) - Definitions


See Also

Re Trizec Equities (1987), 36 DLR (4th) 318 (N.S.C.A.)

A finding that seven floors that were in the process of being added to a 12-storey building, were "building" for purposes of the Assessment Act (Nova Scotia).

Administrative Policy

1 December 1989 T.I. (May 1990 Access Letter, ¶1209)

Services added to land meet the legal definition of land.

IT-153R3 "Land Developers - Subdivision and Development Costs and Carrying Charges on Land"

Subsection 18(3.1) - Costs relating to construction of building or ownership of land


Trynchy v. The Queen, 2001 DTC 5582 (FCTD)

sinking initial piling for grandfathering reasons did not commence construction period

A limited partnership of which the taxpayer was a member poured a single concrete piling for a project that would have required 100 pilings as base support. The sole reason for doing so was to come within s. 18(3.7), and no further work was done on the project until the land was foreclosed. Campbell J. found that various deductions by the partnership were not "incurred during the period of the construction" because construction was an impossibility at the time of the sinking of the initial piling (there being no financing in place) and, indeed, no period of construction of the building ever took place.

Fiore v. The Queen, 93 DTC 5215 (FCA)

improvements were significant

At the time the taxpayer's appeal was heard by the Tax Court, it was agreed with the Crown that of a total of $326,648 spent by the taxpayers in expenditures on two buildings that were purchased in poor condition for a total price of $107,000, $100,000 represented operating expenses and $41,309 was a capital expense. In affirming the finding of the Tax Court Judge that the balance of $174,150 was a capital expenditure within the meaning of s. 18(3.1), it was noted that the property was purchased for a price that was well below its ordinary capital value at the time of purchase, and that in addition to restoring the condition of the building to their ordinary value (which, by itself, would have been sufficient to render the amount a capital expenditure) the work done by the taxpayers involved significant improvements to the assets.

See Also

Morris v. The Queen, 2014 DTC 1149 [at 3481], 2014 TCC 142 (Informal Procedure)

repairs/cosmetic touch-ups

The taxpayer's wife purchased a home, which had been their principal residence, from the taxpayer in order to convert it to rental property. They implemented substantial touch-ups on the property, including roof repair, replacement of the kitchen floor and faucets and closets, and landscaping (including fence repairs and a bridge renovation). The taxpayer claimed losses for two years, which arose from deducting mortgage interest, property taxes, insurance and utilities. The Minister denied the deduction of these expenses (whose claiming by the taxpayer rather than his wife was not discussed) on several grounds, including the limitation in s. 18(3.1).

Campbell J allowed the taxpayer's appeal. The work did not rise to the level of "construction, renovation or alteration," as they were "simply general repairs and cosmetic touch-ups" (para. 28). In the alternative, there was no evidence that the mortgage proceeds were used to finance any of the repair work (para. 29).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs rental operation commenced with repairs and touch-ups 128

Janota v. The Queen, 2010 TCC 395, 2010 DTC 1268 at 3893 (Informal Procedure)

direct costs of repair permitted

The taxpayers bought an old duplex house and carried out extensive repairs, the expenses of which were deductible. Subsection 18(3.1)(a) only bars deductions for "soft costs", such as interest, fees, taxes, and insurance, so the taxpayers' direct costs of repair were allowed.

Baggs v. MNR, 90 DTC 1296 (TCC)

expenses related to repair period which interrupted expansion program

In August 1983 the taxpayer commenced the expansion of a two-unit apartment building into a fourteen-unit apartment building. On December 8, 1983, before the construction was completed, a storm caused serious damage by tearing away the asphalt layer on the roof. Christie A.C.J. held (at p. 1298) that:

"This occasioned a period of repair that either interrupted construction of the apartment for its duration or that run wholly or in part concurrently with it. It is to the period of repair to the apartment building that the expenses in dispute relate and not to the period of construction. On this analysis subsections 18(3.1) and (3.3) have no application to the reassessment under appeal."

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance


1.46 Subsection 18(3.1) of the Act denies the deduction, on a current basis, of certain outlays and expenses that are attributable to the period of, and related to, the construction, renovation or alteration of a building or in respect of the ownership of the related land. These outlays and expenses (commonly referred to as soft costs) include legal and accounting fees, interest, property taxes and other similar costs. Soft costs are required to be added to the cost or capital cost, as the case may be, of the building to which they relate. The related land consists of the land under the building or land that is:

  • immediately adjacent to such land;
  • used (or intended to be used) for a parking area, driveway, yard, garden, or any other similar use; and
  • necessary for the use (or intended use) of the building.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

5 July 2013 Internal T.I. 2013-0489821I7 F - Application of subsection 18(3.1)

realty taxes or premiums related to land which is renovation object

The taxpayer carried out renovations on a rental property extending over more than a year, resulting in the property not being available for rental for a specified period. Expenses deducted by him included insurance, mortgage interest and municipal taxes.

CRA stated (TaxInterpretations translation) that s. 18(3.1) applied to

…insurance premiums attributable to the period of renovation and incurred by reason of the renovation…such as, for example, the part of insurance premiums incurred in order to provide for a risk connected to the renovation.

And added:

For example, that part of the interest on loans connected to the ownership of land subjacent to the building that is the object of a renovation must be capitalized to the cost of building…to the extent that such part of the interest relates to the period of renovation of the building.

And finally:

…only that part of realty taxes attributable to the period of renovation which is connected to the ownership of land subjacent to the building, as well as land satisfying subparagraph 18(3.1)(a)(ii), must be added to the building cost.

9 March 1992 T.I. (Tax Window, No. 17, p. 22, ¶1792))

Interest income received from customers' deposits for buildings under construction cannot be set-off against the interest expense of the contractor which is required to be capitalized.

19 September 89 T.I. (February 1990 Access Letter, ¶1099)

Payments made by the lessee under an emphyteutic lease to terminate leases in order that it could transform the rental property into a hotel complex were deductible notwithstanding s. 18(3.1).

89 C.M.TC - "Capitalization of Soft Costs - Buildings Under Construction"

general discussion

88 C.R. - Q.52

Where a taxpayer has an ownership interest in a building being erected, the taxpayer is considered to have acquired the building to the extent of construction costs incurred to date, or progress billings received to date, as the case may be.

84 C.R. - Q.66

construction in stages

The restriction applies to costs incurred during the period of the construction of the entire building regardless whether it is constructed or renovated in stages.


Bourgeois, "Some Tax Considerations in Real Estate Development and Construction: Soft Costs, Capitalization, Inventory Write-Downs and Characterization of Partnership Income", 1995 Corporate Management Tax Conference Report, c. 4.

Paragraph 18(3.1)(a)

Administrative Policy

9 October 2015 APFF Roundtable Q. 3, 2015-0595761C6 F - Application of ss. 18(3.1)

no capitalization of repair/maintenance expenses incurred during renovation etc.

When asked if it agreed with Janota (cited for the proposition that s. 18(3.1) applies only to the capitalization of soft costs), CRA was somewhat non-commital, but acknowledged that "the general expenses of repair and maintenance which are incurred during the period of Construction [defined to include renovation or alteration] of a building but which are otherwise not related to such Construction do not come within subsection 18(3.1)."

Subparagraph 18(3.1)(a)(i)

See Also

Customs and Excise Commissioners v. Viva Gas Appliances Ltd., [1983] BTC 5064, [1983] 1 WLR 1445, [1984] 1 All E.R. 112 (HL)

The replacement of coal-burning fireplaces in old houses by gas furnaces was found to be the supply of services "in the course of the construction, alteration or demolition of any building". An argument that the alteration was not sufficiently substantial in relation to the building as a whole to fall within the meaning of the quoted phrase was rejected. (Finance Act 1972)

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Noscitur a Sociis 112

ACT Construction Ltd. v. Customs and Excise Commissioners, [1982] 1 All E.R. 84 (HL)

The construction of additional foundations for buildings constituted the "alteration" of those buildings. (Finance Act 1972)

Subsection 18(3.2) - Included costs

Paragraph 18(3.2)(a)

Administrative Policy

89 C.M.TC - "Capitalization of Soft Costs - Buildings Under Construction"

"where a corporation uses available cash to fund the construction of a building and ostensibly borrows money to finance its trade receivables, a portion of the interest paid in respect of the money borrowed would in all probability not be currently deductible."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 2

84 C.R. - Q.67

The interest expense relating to the capital contribution of an arm's length partner will be deductible even though the funds are used by the partnership for construction.

Subsection 18(3.4) - Where s. (3.1) does not apply

See Also

Re Regional Assessment Commissioner, Region No. 14 and Silton Ltd. (1986), 54 OR (2d) 282 (Ont. D.C.)

Respecting s. 7(7) of the Assessment Act (Ont.), Steele J. stated:

"In considering what is the preponderating business, all aspects of the business must be considered and weighed to determine its real function. Depending upon the evidence, these aspects could include capital employed, sales, profits, space occupied, inventories, numbers of employees, the time employed by employees and management, how the business is undertaken and any other relevant factors. It is a question of fact in each case that must be determined as to what is the preponderating business."

The O.M.B. was in error in relying upon sales as the sole criterion.

Administrative Policy

89 C.M.TC - "Capitalization of Soft Costs - Buildings under Construction" - "Principal Business Corporation"

Subsection 18(3.5) - Idem [Where s. (3.1) does not apply]

See Also

Barat v. M.N.R., 91 DTC 1097 (TCC)

A parking garage which was being constructed as part of the same project as a hotel located across the street and which was connected to it by an aerial bridge, was a separate building for purposes of s. 18(3.5) and was not on an immediately contiguous site for purposes of s. 18(3.6) given that it was separated from the hotel by the street. Accordingly, the parking garage did not qualify for grandfathering relief on the basis of the work done on the hotel. Furthermore, work on the parking garage did not proceed without undue delay.

Schneider v. MNR, 89 DTC 198 (TCC)

The purchaser of a building was not entitled to deduct soft costs incurred during the construction period and subsequent to his signing of the purchase documentation, because he had not yet acquired ownership, or the incidents of ownership, of the building.

Administrative Policy

85 C.R. - Q.51

Criteria respecting "substantially advanced".

Paragraph 18(3.5)(d)

See Also

Pogson v. Lowe, [1984] 1 WLR 182 (HL)

It was held that an arrangement had not been made in writing to dispose of land when the notes in writing did not evidence the essential terms of the arrangement (as opposed to evidencing that an arrangement of some sort had been made).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Transitional Provisions 43

Subsection 18(4) - Limitation — deduction of interest by certain corporations


Wildenburg Holdings Ltd. v. Minister of Revenue (Ontario), 2001 DTC 5145 (Ont CA)

The taxpayer submitted that a borrowing from the taxpayer's sole shareholder (a non-resident) to finance the acquisition of Ontario real property by a partnership between it and another Canadian-resident corporation did not have interest paid on it limited by s. 18(4) of the Act (as it applied under the Corporations Tax Act by virtue of s. 12 thereof) because s. 18(4) did not apply to partnership debt. The submission was rejected on the ground that the debt was a debt of the taxpayer and the other corporation, and not a debt of the partnership, in light of the fact that liability of each corporation was limited to 50% of the principal advanced.

Wildenburg Holdings Ltd. v. Minister of Revenue, 98 DTC 6462 (Ont. C.J. (G.D.))

The sole non-resident shareholder of the taxpayer made a loan to what was documented as a partnership between the taxpayer and another Canadian-resident corporation. Pitt J. found that for purposes of s. 18(4) the loan was a debt of the taxpayer and the other corporation, rather than a partnership, in light inter alia of a provision in the loan agreement that provided that the liability of each corporation was limited to 50% of the principal advanced.

Uddeholm Ltd. v. The Queen, 87 DTC 5431, [1987] 2 CTC 236 (FCTD)

Short-term indebtedness owing by the taxpayer to its Swedish parent for goods shipped to it was included in the formula indebtedness nothwithstanding that the parent would not bill for interest on that indebtedness until after the period in question. The court also declined an invitation of taxpayer's counsel "to ignore the fluctuations during the month of November of the balance owing and to adopt a concept of average interest paid and average debt owing during the period."

The Queen v. Thyssen Canada Ltd., 87 DTC 5038, [1987] 1 CTC 112 (FCA)

Late payment charges levied on the taxpayers by its German parent in respect of delays by the taxpayer in paying for merchandise that had been supplied to it by its parent, constituted "interest" for the purpose of s. 18(4), and their deduction accordingly was denied.

See Also

Specialty Manufacturing Ltd. v. The Queen, 97 DTC 1511 (TCC)

Article IX of the 1980 Canada-U.S. Convention and Article IV of the 1942 Canada-U.S. Convention did not prevent the application of s. 18(4) of the Act to limit the deduction of interest by the taxpayer, not withstanding that the loans in question bore interest at an arm's length rate.

Locations of other summaries Wordcount
Tax Topics - Treaties - Articles of Treaties - Article 10 48

Administrative Policy

11 September 2015 Internal T.I. 2015-0599161I7 - Subsection 18(4) and section 216

s. 18(4) rules have always applied to s. 216 returns

A non-resident corporation (the “Taxpayer”), which filed a return under s. 216, took the position that the rules in s. 18(4) (the “Rules”) did not apply to it in light of the fact that 2013 amendments did not apply to taxation years that began before 2014 (a position contrary to 9638945). CRA stated:

Where a non-resident person elects to file a return of income under section 216, the person becomes liable for Part I tax on the income in question “as though the non-resident person were a person resident in Canada.” Therefore, provisions that could apply to calculate the Part I tax of a Canadian resident, including subsection 18(4), will also apply to any non-resident who makes an election under subsection 216(1). There was nothing in the Amendments to indicate that the Rules only apply to such corporations from the effective date of the Amendments, i.e., to taxation years that begin after 2013. Rather, the Amendments provide a specific formula for computing the equity amounts of such corporations for the purposes of applying the Rules. In summary… the Rules apply to the Taxpayer’s interest expense claimed in its 2013-2014 taxation year.

24 December 2013 Internal T.I. 2013-0512551I7 - Thin Cap and partnership income

stub period partnership income inclusion in r/e

A ULC and its wholly-owned subsidiary (ULC II) were the partners of a partnership with a different year end than of ULC. The correspondent considered that the retained earnings of ULC should exclude its proportionate share of the Partnership income for the stub period on the basis that "2007-0248961R3 indicate[s] ... that section 96 informs the determination of the amount of partnership income to be included in determining the amount of a corporate partner's retained earnings for the purpose of the thin capitalization rules."

In disagreeing, the Directorate indicated: "It has been CRA's longstanding position…that, for purposes of subsection 18(4)… a corporation's contributed surplus and retained earnings are to be determined in accordance with ... GAAP" (although it "may not include unrealized appraisal surpluses.") However, to the extent "that ULC used the cost method of accounting to account for its investment in Partnership ... [and] this method is an appropriate basis of accounting for ULC's investment in Partnership as established by Canadian GAAP ... no amount of Partnership's income could be included in determining ULC's retained earnings as at XX, for the purpose of clause 18(4)(a)(ii)(A) of the Act because…no partnership income had been reported for financial statement purposes."

In 2007-0248961R3, CRA "ruled that when partnership income is included in a corporation's consolidated retained earnings pursuant to GAAP, subsection 248(24) would not apply to back out that partnership income when determining that corporation's retained earnings for the purpose of clause 18(4)(a)(ii)(A)... ."

5 December 2012 External T.I. 2012-0445891E5 - Contributed Surplus and Thin Capitalization

IFRS not followed

A non-resident corporation (NRco) transferred its shares of Canco, having a cost and paid-up capital of $100 and a fair market value of $1,000 to Newco in consideration for shares of Newco having a stated capital of $1,000, but with the paid-up capital being ground down to $100 under s. 212.1(1)(b).

For accounting purposes, the transfer of the shares of Canco was initially recorded at fair market value, with the result that $1,000 was added to Newco's share capital account. However, the transfer should have been recorded at cost for accounting purposes. As a result, Newco's share capital account was overstated by $900....[T]he overstatement is corrected by [reducing] the share capital account by $900 and adding that amount to Newco's contributed surplus.

After referring to its position that generally accepted accounting principles govern the determination of contributed surplus, CRA stated that

In applying clause 18(4)(a)(ii)(B) to a corporation that prepares its financial statements in accordance with IFRS, the CRA would also consider that an amount reflected in the corporation's equity reserves would constitute contributed surplus for the purposes of subsection 18(4) to the extent that:

(a) the amount arises on a contribution of capital by a specified non-resident shareholder of the corporation; and

(b) the amount would be categorized as contributed surplus if the corporation's financial statements had been prepared in accordance with Canadian GAAP applicable to entities that do not report under IFRS (i.e., Part II of the CICA Handbook).

Here, as it appeared that the proposed addition to contributed surplus would not accord with Canadian GAAP (i.e., this was a related party transction under which the assets of Newco had a cost of $100), the proposed additon likely would not constitute contributed surplus for the purposes of s. 18(4)(a)(ii)(B).

2005 Ruling 2005-0123631R3 -

GAAR will apply to prevent what otherwise would be the avoidance of the thin capitalization rule when debts owing by a Canadian corporation to a non-resident affiliated corporation (Finco) are transferred by the Finco to a partnership organized by that Canadian subsidiary and a Canadian affiliate in consideration for the issuance of interest-bearing debt by the partnership to the Finco.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 60

9 September 2002 External T.I. 2002-013698 -

The calculation takes into account all the calendar months ending in the year even if there is no debt or equity outstanding in a particular month.

The phrase "the beginning of a calendar month" is "a reference to the earliest moment of the particular calendar month ... . [An] advance made at any other time on the first day would not be included in the corporation's debt to equity ratio until the next month."

If a debt is extinguished at the earliest possible moment in the calendar month, it would not be included in the calculation of "outstanding debts to specified non-residents" for that month.

As an amalgamation is considered to occur at the earliest moment on the day, an amalgamation occurring on the first day of a calendar month will result in Amalco having a PUC and contributed surplus at the beginning of the month for purposes of s. 18(4).

Income Tax Technical News, No. 16

If there is a bona fide partnership and the partners are jointly and severally liable for the partnership debts, RC will view the partnership as the debtor for purposes of s. 18(4), i.e., s. 18(4) will not apply.

23 July 1997 T.I. 963894

Where a non-resident corporation has elected under s. 216(1), the calculation of its "outstanding debts to specified non-residents" and of its retained earnings, contributed surplus and paid-up capital will be made from the perspective of the corporation as a whole rather than taking into account the portion of the above items that relate only to the Canadian rental property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 216 - Subsection 216(1) 58

3 October 1996 Internal T.I. 7-952365 -

Surplus contributed by a person when it was a specified non-resident shareholders included in the computation of the Canadian resident shareholder corporation's equity, even if it is no longer a specified non-resident shareholder.

1996 Corporate Management Tax Conference Round Table, Q. 6

Although preferred shares will be treated as equity even if for accounting purposes they are classified as debt, "the amount of the retained earnings that is reflected on the balance sheet is used for purposes of subsection 18(4) notwithstanding that retained earnings may have been reduced by the amount of the increase in the carrying value of the preferred shares."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) 39

30 August 1995 T.I. 952011 (C.T.O. "Application of 78(1) and 18(4)")

"Subsection 18(4) of the Act can only apply to amounts 'otherwise deductible' and therefore would have no application in the year inventory is eventually sold to restrict deductibility of any capitalized amounts pursuant to either subsections 18(2) or 18(3.1)..."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 78 - Subsection 78(1) 21

92 C.R. - Q.12

S.18(4) will not apply to a loan made to a non-Canadian partnership of which a resident Canadian corporation that is related to the lender is a member. However, where the partnership was primarily formed to avoid the application of s. 18(4), the application of s. 245(2) will be considered.

23 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 5, ¶1038)

The thin capitalization rule does not apply to interest paid by a partnership of corporations unless s. 245 applies.

IT-59R3 "Interest on Debts Owing to Specified Non-Residents (Thin Capitalization)"


Jack Bernstein, Francesco Gucciardo, "Update on Canada-U.S. Merges and Acquisitions", Tax Notes International, March 16, 2015, p. 993

A cashless application of cross-border interest payments (owing Canco to USCo) to satisfy a subscription obligation for shares of Canco is targeted to generate interest deductions in Canada and no income inclusions in the U.S. See detailed summary under s. 20(1)(c).

Nathan Boidman, Rhonda Rudick, "Recent Developments Affecting Foreign Investment in Canadian Real Estate", Tax Notes International, 30 April 2012, p. 449

Comparison of investing in Quebec real estate through a non-resident trust or non-resident corporation.

Janette Y. Pantry, Soraya M. Jamal, "The Thin Cap Rules: Revisiting the Foreign Exchange Anomaly", Corporate Finance, 2011, p. 1934: discussion of effect of s. 261(2)(b) and of Imperial Oil decision.

Greg M. Johnson, "Selected Tax Issues Relating to Capitalizing Private Equity Investments in the Oil and Gas Industry", Resource Taxation, Vol. VI, No. 4, 2009, p. 466

Suggests that the thin capitalization rules do not apply to a non-resident private equity partnership, having no 25% partners, which invests in a Canadian corporation.

Ewens, "The Thin Capitalization Restrictions", 1994 Canadian Tax Journal, Vol. 42, No. 3, p. 954.

Subsection 18(5) - Definitions

Administrative Policy

4 March 2016 External T.I. 2016-0626841E5 - 18(5) and 20(1)(d)

simple interest is not included if compound thereon has accrued but is unpaid

A loan owing by Canco to a specified non-resident accrues simple interest, as well as compound interest on the balance of the unpaid simple interest, with both simple and compound interest remaining unpaid at the end the taxation year. How is the “outstanding debts to specified non-residents” determined? After referencing the requirement in the definition that the “outstanding debts to specified non-residents” be “any amount in respect of interest paid or payable by the corporation is or would be, but for subsection (4), deductible in computing the corporation's income for the year,” CRA stated:

Pursuant to paragraph 20(1)(d)… compound interest may only be deducted in computing a taxpayer’s income if it is paid. Accordingly, if…compound interest accrues on simple interest but is not paid in the year, the compound interest is not deductible by Canco. Therefore, the liability in respect of the accrued simple interest would not meet the definition… .


Administrative Policy

19 September 2015 STEP Roundtable, Q.3

redeemable prefs as equity

Does the position in 9619120, that redeemable preferred shares are treated as equity, irrespective of their accounting treatment, when applying the "thin capitalization" rules in s. 18(4), still apply?

CRA indicated that the classification of a financial instrument, for example, a redeemable preferred share, as debt or equity for purposes of s. 18(4) will be based on its legal form regardless of its accounting classification. However, if there is a particular share term or a statement in the most recent ASC Exposure Draft that causes a concern respecting this longstanding position, the taxpayer should write into the Rulings Directorate providing the example.

Equity Amount

Paragraph (a)

See Also

Mac's Convenience Stores Inc. v. A.G. of Canada, 2015 QCCA 837

dividend triggered application of thin cap rules

The taxpayer did not realize at the time that paying a substantial dividend to its Canadian parent (which reduced its retained earnings) would cause the thin capitalization rules to apply to interest on a loan from a related non-resident corporation. Schrager JA found that rectification was not available to convert the dividend into a stated capital distribution. See summary under General Concepts – Rectification.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Rectification & Rescission thin cap issues were not considered at time of paying a dividend 220

Administrative Policy

18 June 2015 STEP Roundtable Q. 3, 2015-0572201C6 - 2015 STEP Q3 Redeemable Preferred Shares and 18(4)

equity/debt classification based on legal form

Does the position in 9619120 still apply? CRA responded:

It continues to be the position of the CRA that the classification of a financial instrument (e.g. a redeemable preferred share) as debt or equity for the purposes of subsection 18(4) will be based on its legal form regardless of its accounting classification.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Share equity/debt classification based on legal form 51

Subparagraph (a)(i)

Administrative Policy

23 November 2016 Internal T.I. 2015-0618511I7 - Thin Capitalization - Retained Earnings

unconsolidated balance sheet must reflect the same accounting standards applied in the consolidated financials

The Canadian-resident corporate Taxpayer has applied the International Financial Reporting Standards (“IFRS”) in preparing its consolidated financial statements. However, in preparing its unconsolidated financial statements (also using IFRS) for the purpose only of filing its tax returns it later retroactively adopted IFRS 9 (re fair value accounting), and refiled previous returns accordingly. The reported effect was to increase its opening retained earnings at the commencement of the affected years so as to reflect increases in the fair market value of its direct and indirect interests in certain partnerships and corporations (as approximated by including the previously reported net income of such entities in each relevant period.)

Is this use of an accounting standard only in the unconsolidated statements permitted and, if not, can the Taxpayer in the alternative include in its retained earnings its proportionate share of partnership income determined under s. 96(1) when determining the “equity amount” for thin capitalization purposes? The Directorate responded:

[C]onsistency between the consolidated financial statements and unconsolidated financial statements… is expected… to avoid the use of financial statements as a tax planning tool…with the exception that the unconsolidated financial statements would eliminate the consolidation aspects of the consolidated financial statements. …

[T]he Taxpayer should not be able to adopt IFRS 9 in the unconsolidated financial statements prepared for the purpose of filing the tax returns until the time the Taxpayer adopts the same standard in its consolidated financial statements. …

[T]he Taxpayer is not permitted to add its proportionate share of partnership income allocated… under subsection 96(1)… to the retained earnings balance when determining the “equity amount” for thin capitalization purposes. Partnership income is only included in the “equity amount”, as defined in subsection 18(5), if such income is included in the retained earnings of the corporation under the applicable accounting standards.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Accounting Principles consistency between unconsoidated and consolidated financials 143

Paragraph (b)

Administrative Policy

19 August 2016 External T.I. 2015-0585471E5 - Thin cap rules and trusts

calculation of total contributions up to each month and then average

Clarification was requested on the application to a trust of (b)(i)(A) of the definition of “equity amount:”

(A) the average of all amounts each of which is the total amount of all equity contributions to the trust made before a calendar month that ends in the year, to the extent that the contributions were made by a specified non-resident beneficiary of the trust,

CRA stated:

[F]or each of the calendar months that end in the relevant taxation year, the trust would calculate the total contributions to the trust (by the specified non-resident beneficiary) from the trust’s creation to immediately before that calendar month. The trust would then calculate the average of these monthly totals.

Using the example of a calendar 2015 taxation year, this means calculating the total contributions for each of the twelve months of 2015 (i.e., the twelve calendar months that end in the year). For each of those months, the total contributions from a specified non-resident beneficiary from the creation of the trust until the end of the calendar month immediately prior to the calendar month in question would be used. Therefore, for January 2015, the total contributions would be calculated from the creation of the trust until the end of December 2014. For February 2015, it would be the contributions from the creation of the trust until the end of January 2015, and so on. The average of the twelve totals would then be calculated.

Paragraph (c)

Administrative Policy

4 June 2014 External T.I. 2013-0513761E5 - Meaning of "cost" in determining "equity amount"

"cost" not reduced by amortization

Generally, … the "cost" of property …include[s] the amount laid down to acquire such property. … The Queen v. Canada Trustco Mortgage Company (2005 DTC 5523),…stated…that ‘[t]extually, the CCA provisions use ‘cost' in the well-established sense of the amount paid to acquire the assets….'…[T]he term "cost" for the purposes of the definition of "equity amount" in subsection 18(5)… means the original acquisition cost of a property. As a result, in the case of depreciable property, any amortization claimed in respect of the property should not, in our view, be taken into account in determining the "cost" of such property… .

Words and Phrases
cost in respect of

22 July 2014 External T.I. 2014-0526631E5 - Definition of equity amount - cost of ECP

"cost" of ecp means original acquisition cost

Eligible capital property is used by a non-resident corporation in its business carried on in Canada. CRA stated:

As indicated in… 2013-0513761E5… the term cost in the definition of "equity amount" in subsection 18(5)… means the original acquisition cost of property. … As such, the term cost used in the definition of "equity amount" has a different meaning in respect of eligible capital property than the "cost amount" in respect of such property.

Outstanding Debts to Specified Non-Residents

Administrative Policy

24 November CTF Annual Roundtable, Q.10

foreign-currency debt to Canco translated at historical rate

Based on s. 261(2), the amount of U.S.-dollar denominated debt is to be measured for thin cap purposes in Canadian dollars based on the FX rate at the time the loan was made.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) application where no gain on shares/non-application to loss-shifting transactions 313

21 November 2011 External T.I. 2010-0384001E5 - Guarantee/Collateral/ASPE effect on Thin Cap

Generally the hypothecation of assets by a non-resident controlling individual, or a guarantee by him or her, in order to secure a loan from an arm's length foreign bank would not cause that loan to be included as an outstanding debt to a specified non-resident.

93 C.M.TC - Q. 3

Any accrued interest that is not paid on its due date becomes a "debt or other obligation to pay an amount" at that time, with the result that interest that accrues on that amount thereafter will be included in the outstanding debts to specified non-residents.

15 July 1992 T.I. 920963 (January - February 1993 Access Letter, p. 11, ¶C9-255)

Given the breadth of s. 18(5)(a)(i)(A)(II), the thin capitalization rules will apply to loans made by a U.S. subsidiary to a Canadian parent corporation that is controlled by related Canadian resident individuals, or to a loan made by a U.S. subsidiary to a Canadian subsidiary of a Canadian parent.

Specified Right


Jason Boland, Christopher Montes, "A Detailed Review of the Back-to-Back Loan Rules", 2016 CTF Annual Conference draft paper

Scope of “specified right” (pp. 5-6)

[O]ne of the main reasons for the introduction of a more robust back-to-back rule in the thin capitalization context in 2014 was to attempt to catch situations where a particular non-resident indirectly funds a particular debt by granting certain security interests or property rights to the intermediary (instead of loaning money to the intermediary)….

[T]he definition of specified right now appears to target security interests and property rights that the intermediary can monetize and use to fund the particular debt to the taxpayer. …

[I]f a foreign parent corporation has a Canadian subsidiary and a foreign subsidiary, and the group enters into a multiparty credit agreement where all parties guarantee the facility, pledge their assets and borrow, except that the subsidiaries do not guarantee the foreign parent's borrowings for foreign tax reasons, the requirements for the exception to the definition of "specified right" may not be satisfied. [fn 31: [J]oint Committee…July 25, 2016…at page 12.] …

[T]he formulas in the back-to-back rules in subsection 18(6) make use of the precise FMV of the specified right property, which could require such property to be valued on a regular basis. This may be difficult if the property is illiquid…

Amanda S.A. Doucette, Britney Wangler, "Normal Borrowing by CCPC Owners Can Create an Income Inclusion", Canadian Tax Focus, Vol. 7, No. 1, February 2017, p. 1

A secured guarantee by a private corporation of a bank loan to its individual shareholder may very well cause an income inclusion to the individual under the s. 15(2.17) back-to-back loan rules. In order for the bank not to have a specified right, the key consideration is that the secured property can be used only to repay the shareholder debt. However (p.1):

[M]ost guarantees and related security agreements contain broad language that covers not just the present debt but also any future indebtedness of the individual shareholder. Because of this breadth of coverage, a specified right arises, and with it the tax problem.

In addition (pp. 1-2):

In certain circumstances, a single security document (given by the corporation to the third party [e.g., bank]) can cover both (1) the individual shareholder's loan from the third party and (2) an existing operating loan given by the third party to the corporation. Because the single security document covers more than just the individual shareholder's loan, a specified right arises.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.17) 351

John Lorito, Trevor O'Brien, "International Finance – Cash Pooling Arrangements", 2014 Conference Report, (Canadian Tax Foundation), 20:1-33

Specified rights (defined as tantamount to ownership) rarely granted to creditors except re cash collateral (p. 9)

[I]n simple terms, a specified right is the right of a person to treat the property as it if it was the person's own property including the right to encumber and sell the property and to use the proceeds in whatever manner the person chooses. Such a right would rarely if ever be granted in respect of a property used to secure a debt or other obligation, except possibly in the case of cash collateral. Generally, a person who receives cash collateral to secure an obligation would typically have the ability to use the cash in any manner it chooses subject to the obligation to return an equivalent amount of cash when the obligation is extinguished.

Steve Suarez, "Canada Releases Revised Back-to-Back Loan Rules", Tax Notes International, October 27, 2014, p. 357.

Expansion of permitted security rights under s. 18(5) - "specified right"(p. 362)

Second…[t]he revised ''specified right'' definition appears to have been improved in two ways, both of which in general seem to accommodate normal course secured guarantees and similar security arrangements typically found in commercial lending agreements. First, the party holding the security can pledge the secured property to secure the repayment of other debts, as is sometimes provided for in secured property legislation and some derivatives agreements….

Second, earlier versions of the ''specified right'' definition seemed to cause an event of default under the Canco debt (which typically gives a Creditor Party the immediate right to sell the secured property) to itself result in a specified right,…[whereas] the revised definition seems to prevent this if it can be shown that the Creditor Party must use any sale proceeds from the secured property to repay the Canco debt (or certain related debts)….

Subsection 18(6) - Loans made on condition

See Also

Langhammer v. The Queen, 2001 DTC 45 (TCC)

Before going on to find that losses sustained by the taxpayer after investing in bonds of a condominium development were deductible under s. 20(1)(p)(ii) on the basis that the bonds were purchased in the course of carrying on a money lending business, Rip T.C.J. stated (at p. 52) that it had been recognized that "a debenture could be part of the portfolio held by a person carrying on the business of lending money; and that "debentures, bonds and term deposits are loans".

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(ii) occasional loans were money-lending business given that done similarly to a money lender 245

Administrative Policy

27 July 1990TI AC 59653

With respect to a situation where a company deposited borrowed funds from a related non-resident person into a bank account which was pooled by a group of related companies, it was the taxpayer's submission that it would not be possible to trace the flow of the borrowed funds, with the result that it could not be shown that the funds had been borrowed on the condition that they would be relent to a particular person.

23 June 1989 TI 7-3792

S.18(6) would not apply where a non-resident corporation ("NRP") acquired a security that was not a debt obligation of a Canadian bank or a person not dealing at arm's length with that bank pledged the security to the Canadian bank to secure a guarantee by NRP of a loan made by the Canadian bank to a Canadian subsidiary of NRP. If NRP made additional deposits with a foreign bank as security for a guarantee by that foreign bank of a loan to be made to the Canadian subsidiary by the Canadian bank, such deposits would be considered to be loans to the foreign bank which would not have been made if the Canadian bank did not make its loan, with the result that s. 18(6) would apply. Where the security for such inter-bank guarantee comprised preexisting term deposits which were subsequently "renewed" because the terms of the inter-bank guarantee so required, s. 18(6) would generally apply at the time of the renewal.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(6) 33

Income Tax Technical News, No. 15, "Back-to-Back Loans in Relation to Subsections 18(4) and 18(6)".

2 October 1996 T.I. 961781 (C.T.O. "Thin Capitalization Back-to-Back Loans")

S.18(6) will not be applied to a second loan made by a corporation resident in Canada ("Canco 1") to a second Canadian-resident corporation ("Canco 2") provided that: the person who made the first loan to Canco 1 is a specified non-resident shareholder of Canco 1 and qualifies as a specified shareholder of Canco 1 otherwise then by virtue of a right referred to in paragraphs (c) or (d) of the definition of specified shareholder in s. 18(5); the first loan and the second loan bear the same rate of interest; and Canco 1 is related to Canco 2.

93 C.M.TC - Q. 9

Where a loan is made by a non-resident person to his wholly-owned Canadian subsidiary which, in turn, makes a similar loan to a second-tier Canadian subsidiary, s. 18(6) generally will not be applied.

18 January 1993 External T.I. 5-921647 -

Where a U.S. parent loans $100 to a wholly-owned Canadian subsidiary, and s. 18(4) applies to deny all of the interest charges of $10 payable on the first loan on the condition that the same amount be on-lent to a second wholly-owned subsidiary, RC will not apply s. 18(4) to deny the deduction by the second subsidiary of interest on the second loan. However, s. 18(4) would be to the second loan if s. 18(4) applied to deny the first Canadian subsidiary less than $9 of its interest deduction. In such event RC's policy will apply to permit the deduction of interest on the second loan only to the extent necessary to ensure that the denial of the interest deduction on the first loan is not duplicated.

18 July 1989 T.I. (Dec. 89 Access Letter, ¶1044)

S.18(4) applies where a non-resident corporation lends to an adequately-capitalized wholly-owned Canadian subsidiary, which subsequently loans money to its wholly-owned operating Canadian subsidiary.

23 June 1989 TI 7-3792

Discussion of consequences of a guarantee by the non-resident parent of the Canadian borrower of a Canadian bank loan, including a finding that s. 18(6) should not apply by virtue only of the guarantee.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(6) 160

Paragraph 18(6)(c)

Administrative Policy

17 November 2015 Roundtable, 2015-0614241C6 - 2015 TEI Liaison Meeting Q.6 - Specified Right

cross-border notional cash-pooling arrangement produced intermediary debt

A notional cash pooling arrangement between (i) a non-resident parent and its various subsidiaries including Canco, and (ii) a non-resident bank, as a result of which Canco has an overdraft balance in its pool account, is caught by the back-to-back loan rules in ss. 18(6)(c)(i) and 212(3.1)(c)(i). Accordingly, it is not necessary to consider whether the right of the non-resident bank to offset overdraft balances of any pool participants against deposit balances of other pool participants without prior notice engages the specified right rules in ss. 18(6)(c)(ii) and 212(3.1)(c)(ii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Paragraph 212(3.1)(c) cross-border notional cash-pooling arrangement engages the B2B loan rules 227

28 May 2015 IFA Roundtable Q. 5, 2015-0581531C6 - IFA 2015 Q.5: "Causality test" in 18(6) & 212(3.1)

"because of" causality test

What is the requisite degree of linkage referenced by the "because" test in clause (B) of ss.18(6)(c)(i), 18(6)(c)(ii), 212(3.1)(c)(i) and 212(3.1)(c)(ii) (the "Clause B causality tests") between a debt owing by the taxpayer to a creditor and a secondary obligation existing between that creditor (or someone not dealing at arm's length with that creditor) and certain non-residents, so as to engage s. 18(6.1) or 212(3.2)? CRA responded:

The so-called "back-to-back loan" arrangements were described [in the 2014 Budget] as generally involving the interposition of a third party (e.g., a foreign bank) between two related taxpayers (such as a foreign parent corporation and its Canadian subsidiary) in an attempt to avoid the application of rules that would apply if a loan were made, and interest paid on the loan, directly between the two taxpayers.

…[T]he October 2014 Explanatory Notes…[state] that the conditions listed in paragraph 212(3.1)(c) closely mirror those in paragraph 18(6)(c)… . CRA will interpret the Clause B causality tests in both of these provisions in the same manner and broadly enough to fulfill the policy intent of the new back-to-back loan rules as described in the 2014 Budget Plan. …[G]enerally, in a case where a third party intermediary is interposed between two related taxpayers principally for the purpose of avoiding the application of subsection 18(4) or Part XIII tax on interest…we would find that there is sufficient linkage between the two debt instruments involved to engage the new rules.


Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.

Simplified overview of rule (p. 10:13)

A back-to-back loan exists when a Canadian resident has an outstanding interest-bearing debt obligation (Canadian debt) to an arm's-length lender (intermediary) if there is a debt owing by the intermediary (or a person who does not deal at arm's length with the intermediary) to a person who does not deal at arm's length with the Canadian resident (intermediary debt), and when any one of the following three conditions are met:

1) recourse of the intermediary debt is limited to the Canadian debt;

2) a strong causal connection exists between the intermediary debt and the Canadian debt; or

3) the intermediary (or a person that does not deal at arm's length with the intermediary) has a "specified right" granted by a non-resident connected to the Canadian resident, and a strong causal connection exists between the specified right and the Canadian debt.

Steve Suarez, "Canada Releases Revised Back-to-Back Loan Rules", Tax Notes International, October 27, 2014, p. 357.

Introduction of requirement for strong causal connection (p. 361)

Two aspects of the revised secondary obligation definition merit further comment. First, both the Creditor Party [intermediary] debt and Creditor Party [specified] right elements of the revised definition now use the term ''because'' to delineate what causes a secondary obligation [intermediary debt] to exist. This represents a significantly higher standard than was the case under the August 29 version of the term, and the concept appears to have been imported from another ''indirect loan'' rule in the ITA [in s. 17(2)].

[I]n AG of Canada v. Hoefele ... [fn 15: 95 DTC 5602 (FCA)…] the Federal Court of Appeal interpreted the ''because'' standard as implying a ''strong causal connection''… .

Subparagraph 18(6)(c)(i)

Paragraph 18(6)(d)


Jason Boland, Christopher Montes, "A Detailed Review of the Back-to-Back Loan Rules", 2016 CTF Annual Conference draft paper

Purposes of the s. 18(6)(d) de minimis rule (p. 4)

[There] is a de minimis requirement to ensure that the back-to-back rule only applies if the particular non-resident funds, through an intermediary, a significant portion of the particular debt and connected debts. The total principal amount of the intermediary debt and/or fair market value ("FMV") of the property subject to the specified right must be at least 25% of the total principal amount of the particular debt and connected debts. In other words, if the intermediary funds the particular debt primarily from its own sources (i.e., from sources other than a particular non-resident), the back-to-back loan rules should not apply.

Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.

Simplified overview of rule (p. 10:13)

[A] safe harbour exists when the intermediary debt represents less than 25 percent of the Canadian debt, which ensures that the back-to-back loan rules do not apply if the Canadian debt is funded by the intermediary mainly from sources other than a non-resident connected with the Canadian resident.

Subsection 18(7) - Partnership debts

Administrative Policy

28 July 2015 External T.I. 2015-0567811E5 - Thin cap rules for members of a partnership

sale by Cancos of their partnership interests part-way through year did not eliminate their proportionate pick-up of partnership debt

Canco (wholly-owned by NRco) and its wholly-owned subsidiary (Canco Sub) held respective 99.9% and 0.1% interests in the "Partnership" and, before the end of 2015, sold their interests in the Partnership to non-resident subsidiaries of NRco, so that all of the Partnership income or loss for 2015 was allocated to them.

Before rejecting an argument that the Partnership had no "deductible" interest for 2015 (so that the thin cap rules did not apply to the Canco partners) as its partners at year end were not "taxpayers" as required by s. 96(1), CRA stated:

Canco and Canco Sub would determine their "specified proportion" for their 2015 taxation year based on the allocation of the Partnership's income for the fiscal period ending December 31, 2014… . Accordingly, subsection 18(7) would apply to deem Canco and Canco Sub to owe 99.1% and 0.1% of the Loan and to have paid the corresponding interest.

See summary under s. 12(1)(l.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(l.1) sale by Cancos of their partnership interests part-way through year did not eliminate their proportionate pick-up of partnership debt 338

Subsection 18(9) - Limitation respecting prepaid expenses


Urbandale Realty Corp. Ltd. v. The Queen, 2000 DTC 6118 (FCA)

The taxpayer, a real estate developer, prepaid municipal real estate development charges applicable to one of its residential lots developments. Noël J.A., in finding that current deduction of the charges was not precluded by s. 18(9)(a)(i), noted that the charge, being a one-time tax, was not paid in respect of a future period.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 83

Canderel Ltd. v. Canada, 98 DTC 6100, [1998] 1 S.C.R. 147

After noting that tenant inducement payments ("TIPs") were not covered by s. 18(9), Iacobucci J. stated (at p. 6110) that "the fact that Parliament has directed its mind to requiring amortization of some expenses without requiring this of TIPs is ... telling to some extent. Parliament would be free to institute this requirement, but has not done so".

The Queen v. Toronto College Park Ltd., 96 DTC 6407 (FCA), rev'd 98 DTC 6088 (SCC)

Before finding that s. 18(9) extended to running expenses which, therefore, would not otherwise be subject to the matching principle, Robertson J.A. noted that s. 18(9)(a)(ii) would apply to prepaid rents which by virtue of being overhead expenses could not be reasonably or directly attributed to the production of a specific revenue, and that s. 18(9)(a)(i) would apply to a prepaid service contract for the repair and maintenance of a building, which would be another example of overhead expense which could not be related directly to a specific source of income.

See Also

SPG International Ltée v. The Queen, 98 DTC 1706 (TCC)

S.18(9)(b) authorized the deduction in 1991 by the taxpayer of expenses incurred by it in 1990 to participate in a 1991 trade fair.

Administrative Policy

28 April 2015 External T.I. 2015-0566011E5 - Whether s. 16.1 applies to a transport truck

deferred deduction of initial lease "down payment"

After finding that since a transport truck was an exempt property for s. 16.1 purposes, no s. 16.1 election could be made, CRA noted that the taxpayer would pay an initial down payment for the lease of the transport truck, and stated:

[S]ubparagraph 18(9)(a)(ii)…denies a deduction made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred as, on account of, in lieu of payment of, or in satisfaction of, among other things, rent, which is in respect of a period that is after the end of the year. However, pursuant to paragraph 18(9)(b) of the Act, any rent payments that are denied under paragraph 18(9)(a) may be deducted in calculating a taxpayer's income for the subsequent year to which the outlay or deduction can reasonably be considered to relate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) identification of lease based on legal substance/no election for transport truck 197

27 August 2012 Internal T.I. 2012-0442831E7 -

In reviewing a "step-down" lease (i.e., one where the annual lease payments are higher in the initial years), CRA concluded that there was no basis for concluding that the higher rents in the initial years represented payments of rent for subsequent years.

30 January 2003 External T.I. 2002-016978 -

The purchase of a single-premium product liability policy by a manufacturer covering goods manufactured in the year would be subject to s. 18(9)(a)(iii). CCRA likely would allow the manufacturer to amortize the premium equally over the average expected life of the goods manufactured in the year.

11 July 1995 Internal T.I. 7-950599 -

A client, who purchases an extended warranty on an asset that will be used for business purposes, will be required to apply s. 18(9) "where the set amount may reasonably be regarded as having been incurred as consideration for services to be rendered or for insurance in respect of a period, after the end of the year".

14 June 1994 T.I. 940977 (C.T.O. "Single Premium on a Group Term of Life Insur for Retire")

A single group term life insurance premium paid by an employer in the situation where the coverage is obtained during the ongoing employment of an employee, upon the retirement of an employee or as a result of an extraordinary event such as a plant shutdown will not be currently deductible to the extent the premium is in excess of the annual premium that would otherwise be payable for the same coverage. In each future year, s. 18(9)(b) permits a deduction for that part of the premium which was not deducted in a previous year and which relates to coverage in that year.

1994 A.P.F.F. Round Table, Q. 36

Where after paying annual municipal taxes of $1,000 for five years, the taxpayer is offered two options - continue to pay municipal local improvement tax over the next 10 years at $1,000 per year, or pay a lump sum of $6,000 - a lump sum payment of $6,000 will be annually deductible (at the taxpayer's option) at a rate of $1,000 or $600.

25 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 19, ¶1017)

Where an employer discharges its obligation to provide life insurance coverage to retired employees by purchasing a single premium insurance policy upon the employee's retirement, s. 18(9)(a)(iii) restricts the deductible amount of the single premium to the amount paid in respect of coverage for the year in question. The balance of the premium is deducted in future years in relation to the future coverage.

29 January 1990 T.I. (June 1990 Access Letter, ¶1250)

Where an up-front fee is paid by a bank to another financial institution in respect of an interest-rate cap, no deduction may be made in the year of payment in respect of the portion of the fee which may be viewed as consideration for services to be rendered after the end of the year.

89 C.M.TC - Q.4

for the 1989 and prior years, RC will accept that an interest buy-down payment which is made in the middle of a mortgage term and which was not provided for in the mortgage document, is prepaid interest. [C.R: 18(1)(b) - "Capital expenditure v. expense"]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 249 - Subsection 249(1) 65

84 C.R. - Q.68

Where the party that was to provide prepaid services has gone out of business, with the result that the taxpayer is unable to recover the prepaid amount, then s. 18(9) will no longer apply to limit the taxpayer's deduction.

IT-417R2 "Prepaid Expenses and Deferred Charges"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9.2) 0


Joseph Frankovic, "The Income Tax Treatment of Prepaid Expenses and Similar Costs: A Time Value Analysis", 2000 Canadian Tax Journal, Vol. 48, No. 5, p. 1371.

Subsection 18(9.1) - Penalties, bonuses and rate-reduction payments

Administrative Policy

27 January 2017 External T.I. 2013-0482351E5 - Clause 95(2)(a)(ii)(D)

s. 18(9.1) applied where loan prepayment penalty was equal to PV of interest thereon

CRA indicated that where a loan from one controlled foreign affiliate (FA Finco) of Canco to a second CFA of Canco (FA Holdco) meets the conditions in s. 95(2)(a)(ii)(D), a prepayment penalty paid by FA Holdco to FA Finco also can be recharacterized as active business income by s. 95(2)(a)(ii)(D) if the penalty is first recharacterized as interest under s. 18(9.1)(e). The loan had arm’s length terms including a clause that, upon FA Holdco opting to repay a portion of the principal amount before its maturity date, required it to pay a penalty not exceeding the present value of the interest that would otherwise have been payable by it. CRA stated:

Once the penalty amount is paid, paragraph 18(9.1)(e) (which applies for the purposes of the Act, including the computation of income from property described in the pre-amble to paragraph 95(2)(a)) will in the above circumstances deem the amount of the penalty to have been paid by FA Holdco and received by FA Finco as interest on the Loan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(a) - Subparagraph 95(2)(a)(ii) - Clause 95(2)(a)(ii)(D) s. 95(2)(a)(ii)(D) can recharacterize a loan prepayment penalty as active business income 434
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(2.7) loan prepayment penalty fully deducted from surplus when paid 155

Computing the deemed interest amount


For tax purposes, an amount deemed to have been paid as interest under paragraph 18(9.1)(e) will be considered interest for tax years ending after the rate reduction fee or prepayment penalty is paid (such tax years are referred to below as future tax year(s) ). The deemed interest is limited to the amount of the payment that reasonably relates to the value of the interest otherwise payable on the debt obligation (see ¶1.35) in a future tax year if the interest rate had not been reduced, or all or part of the debt obligation had not been repaid before its maturity.


The value of the interest otherwise payable on the debt obligation must be measured at the time the rate reduction fee or prepayment penalty is paid and may be determined using a straight line or present value method. In ¶1.37, we refer to this value as the hypothetical interest value.

Deduction of deemed interest


The deeming rule in paragraph 18(9.1)(f) addresses some of the requirements for the deduction of interest under paragraph 20(1)(c). If the requirements of paragraph 20(1)(c) are met, a taxpayer will be entitled to an interest deduction in a future tax year to the extent of the hypothetical interest value. If the payment exceeds the hypothetical interest value, the excess is:

  • not deemed to be interest under paragraph 18(9.1)(e); and
  • not deductible under any provision of the Act.

11 January 2013 External T.I. 2012-0436771E5 - Sale of a business

penalty paid by shareholder

The sole shareholder of Aco is required under the terms of the share sale agreement to repay, in full, at closing, a bank loan owing by Aco and an early repayment penalty. The early repayment penalty is not deductible by Aco as it is paid by its former shareholder. However, if under alternative facts, Aco paid the early repayment penalty directly, the amount of the penalty generally would be deductible under s. 18(9.1) over what would have been the remaining term of the loan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) continued deduction where debt settlement by shareholder rather than taxpayer 22
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) sale agreement required loan prepayment penalty 60

30 March 2007 External T.I. 2005-012906 -

PV excess

The portion of a payment made to reduce the interest rate on a loan will not be deductible to the extent that it exceeds the present value of future interest obligations on the loan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9.7) 21

23 November 2005 External T.I. 2005-015607 -

prepayment bonus

Where part way through the term of a mortgage borrowing the taxpayer prepays the mortgage upon payment of a prepayment penalty equal to six months' interest, the penalty should be pro-rated over the remaining term of the mortgage.

30 September 2003 Internal T.I. 2003-0023137 -

current and cumulative test

Upon an acquistion of control of a taxable Canadian corporation (the "Debtor"), it was required to make an offer to repurchase its (Cdn.$) Class A and (U.S.$) Class B Notes at a make-whole premium. As a result it redeemed those notes by drawing down under an existing term facility. It deducted the premiums in full when paid under s. 9, and the TSO proposed instead that they be deducted on a strainght-line basis over the years remaining under the original terms. The Directorate stated:

Finance… informed us that the two conditions set out in the Mid-Amble are intended to apply to the total otherwise payable for the term of the obligation in future taxation years (i.e., note the reference in the Mid-Amble to "a" taxation year ending after that time) and to each taxation year that the taxpayer actually claims a deduction (note the reference in paragraph 18(9.1)(f) to the computation of the taxpayer's business or property income for "the" year. ...

[T]he Mid-Amble sets out the "global tests," and the "yearly tests" are set out in 18(9.1)(f). Accordingly, the portion, if any, of the Eligible Penalty Amount (the Penalty Amount described in paragraph 18(9.1)(d) that meets the two conditions set out in the Mid-Amble) is, subject to the yearly test, prorated over the remaining term (but for the repayment) of the debt obligation. The prorated portion of the Eligible Penalty Amount is deductible pursuant to paragraph 18(9.1)(f) as interest expense in the future taxation year to which it relates.

15 May 2002 External T.I. 2003-001161 -

straight-line v. present value method

Discussion of proposal to switch method of amortization of penalty or bonus from straight-line method to present value method.

13 September 2000 External T.I. 2000-003682 -

S.18(9.1)(d) would not characterize a premium paid for a bond purchased by the issuer in the open market in the normal manner as a bonus payable because of the repayment of the debt obligations before its maturity. Instead, the excess would be deemed by s. 39(3)(b) to be a capital loss.

24 April 1998 T.I. 9802565 [arm's length refinancing with different lender generally not a substitution]

arm's length refinancing with different lender generally not a substitution

"A prepayment penalty incurred by a taxpayer who borrows money from one arm's length party to pay a pre-existing debt owing to another arm's length party would generally be deductible pursuant to subsection 18(9.1) of the Act over what would have been the remaining term of the obligation. However, in our view, if the terms of the original obligation have been modified or extended with the same or a different person such that the transaction would constitute a rescheduling or restructuring of a debt obligation, the provision of subparagraph 20(1)(e)(ii.2) of the Act may apply in respect of the borrowing."

1998 Ruling 9802143 [refinancing through new bond offering not a debt substitution]

refinancing through new bond offering not a debt substitution

A Canadian corporation (Opco) borrows under a public offering of "New Bonds"in order to to make a cash tender offer at a premium for the "Existing Bonds" and to make a cash tender, also at a premium, for the convertible debentures.

The amount of the Existing Bond Offer Premium to be paid in respect of each of the Existing Bonds relates to, and does not exceed, the value at the time of the payment of the amount that, but for the repayment, would have been paid or payable by Opco as interest on the Existing Bonds in taxation years ending after the date the Existing Bond Offer Premium payments were made [and similarly re the debenture premium].

Rulings that ss. 18(9.1)(e) and (f) will appply the the premiums. The ruling summary stated that "'substitution', for purposes of subsection 18(9.1), does not include payments made to buy down an interest rate or, bonus or penalty payments made to prepay the principal of a debt obligation in situations where the debtor has parted with something such that there has been a 'performance of obligation' and that the performance involves an actual payment (not a promise to pay in the future) by the debtor".

1996 Ruling 961368

With respect to a situation where a taxable Canadian corporation made an offer to purchase at a premium outstanding notes that were eligible for the exemption under s. 212(1)(b)(vii), RC ruled that provided that the premium "cannot reasonably be considered to have been made in respect of the substitution of the Notes into another debt obligation", the premium will be exempt.

23 October 1995 Memorandum 950376 [straight line method]

straight line method

"Both the straight line and the present value method of amortization are acceptable for the purposes of subsection 18(9.1)."

26 October 1994 Memorandum 942587

S.18(9.1) originally was intended as an alleviating measure for farmers who prepaid their loans but were denied a deduction for the portion of the prepayment that represented interest, although when the legislation was introduced it was not restricted to farmers.

21 October 1993 T.I. 932532

Where penalty payments are made in order to pay off a mortgage, or reduce the interest rate on a mortgage, prior to the sale of the mortgaged capital property, the payment will be considered to have been made or incurred for the purpose of making the disposition and s. 40(1)(a)(i) will be applicable. However, if a substitute property is acquired, s. 18(9.1) may have application.

19 August 1992 Memorandum 922019 (Tax Window, No. 23, p. 14, ¶2156)

S.18(9.1) applies to a bonus or a penalty payment on the early redemption of debentures, provided that it was not paid to extend the term of the debt and that the money continues to be used for the purpose for which it was borrowed in each future year that the deduction is claimed. The bonus is deducted on a straight-line basis in accordance with s. 18(9) over the period that the obligation otherwise would have remained outstanding.

14 August 1992 Internal T.I. 7-921593 -

General discussion of requirements the satisfaction of which permit the deduction of a bonus payment on a straight-line basis over the period of time the obligation otherwise would have been outstanding.

4 May 1992 Tax Executive's Institute Roundtable, Q. 11, No. 92063651 (December 1992 Access Letter, p. 49)

A bonus paid on early repayment of a debt obligation should be deducted on a straight-line basis over the period during which the obligation would have remained outstanding but for the prepayment.

1 May 1992 T.I. 920313

With respect to a situation where a Canadian corporation repaid a bank loan out of the proceeds of a long-term debenture and incurred an early repayment penalty, RC stated that "it is a question of fact whether the payment may reasonably be considered to have been made in respect of the substitution of a debt obligation (the long-term debentures) for another debt obligation, in which case new subsection 18(9.1) would not apply".

9 January 1992 Memorandum 9718371 (Tax Window, No. 15, p. 6, ¶1677)

Bonuses paid by borrowers in a money-lending business on the early retirement of obligations are now governed by s. 18(9.1).


Subsection 18(9.2) - Interest on debt obligations

Administrative Policy

2 December 1992 Memorandum (Tax Window, No. 30, p. 9, ¶2484)

S.18(9.2) will not apply to a zero coupon bond issued to investors at a price equal to the net present value of the face value payable on maturity, because there is no prepaid interest.

IT-417R2 "Prepaid Expenses and Deferred Charges"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9) 0


Richardson, "Tax Amendments Facilitate Issue of Synthetic Zero Coupon Debt", Corporate Finance, Vol. 1, No. 1, 1992, p. 8: Discussion of WIC and Rogers' LYONs transactions.

Novek, "Deductibility of Financing Expenses", 1992 Corporation Management Tax Conference, C.3.

Subsection 18(9.7) - Idem [Interest on debt obligations]

Administrative Policy

30 March 2007 External T.I. 2005-012906 -

S.18(9.7) does not apply where a payment is made for a reduction in the rate of interest payable on a loan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9.1) PV excess 34

Subsection 18(10) - Employee benefit plan

Administrative Policy

2 May 1990 Memorandum (October 1990 Access Letter)

Discussion of a plan available to both resident and non-resident athletes who play games both in Canada and the U.S.

Subsection 18(11) - Limitation

Paragraph 18(11)(c)

See Also

Walton v. MNR, 89 DTC 423 (TCC)

A retiring civil servant, who purchased a past service pension the cost of which was payable by him over a 20-year period in monthly payments over half of which implicitly were interest, was entitled to deduct the monthly payments in full pursuant to s. 8(1)(m).

Subsection 18(12) - Work space in home

See Also

Doleman v. The Queen, 2011 DTC 1257 [at 1474], 2011 TCC 349 (Informal Procedure)

shared facilities in bed and breakfast

The taxpayer carried on a bed and breakfast operation in his home. V.A. Miller J. affirmed the Minister's assessment that the taxpayer's business was part of a self-contained domestic establishment, so that the deduction of expenses was limited by s. 18(12). Unlike in Rudiak, the taxpayer's house did not have a separate guest area with its own entrances and facilities. The guests in the present case shared the dining room, kitchen, study and washrooms with the taxpayer and his family.

The Minister's determination that the business use of the home was 25% was reasonable. (The Minister classified the rooms as "100% business use," "shared" and "100% personal use" spaces. By square footage, 18.73% was for 100% business use. The Minister allocated 10% of the 49.22% shared space to business use, based on the business's 10% occupancy rate. This suggested a business use of 23.65%, which approximated 25%.)

Arbeau v. The Queen, 2010 DTC 1203 [at 3526], 2010 TCC 307 (Informal Procedure)

electronic repair, and hydro pole inspection, businesses were separate

The repairing by the taxpayer of electronic appliances primarily at his home was found to be a separate business from his contract for BC Hydro of inspecting hydro electric poles and pole structures, given that there was essentially no connection between the two operations other than that they were both performed by him with his home as a base of operations. Accordingly, losses generated in prior years from the appliance repair business (which had minimal revenue) were not deductible from his income as an inspector for BC Hydro.

Ryan v. The Queen, 2006 DTC 2738, 2006 TCC 132 (Informal Procedure)

meetings by telephone

The taxpayer, a physiotherapist, worked full time at one physiotherapy clinic, and performed primarily management and administrative functions with respect to a second physiotherapy clinic.

His home office was his principal place of business with respect to the second clinic. Respecting the first clinic, his home office was used exclusively for the purpose of earning income from that business. Furthermore, it had been accepted that a professional could meet with patients by means of making himself available to answer their queries by telephone, and the taxpayer made three to five telephone calls per evening to patients with respect to follow-up matters and also made calls on Saturdays. Accordingly, he satisfied the "regular and continuous" requirement of s. 18(12)(a)(ii).

Words and Phrases

Jenkins v. The Queen, 2005 DTC 384, 2005 TCC 167 (Informal Procedure)

In finding that the principal place of business for the taxpayers, who carried on through a partnership a fishing business using two boats owned by them, was the work space in their home, Miller J. stated (at pp. 386-387):

"... In asking ... what is meant by 'principal place of business', the answer is likely to be: 'where all the business stuff takes place'; not where the oil is drilled or crop is cut, or fish are fished, but where those necessary elements of telephoning customers and suppliers, filling in invoices, doing payroll, maintaining books and records, contacting authorities for licenses, preparing tax returns, chasing down receivables, handling complaints, creating business plans, preparing financial statements, talking to accountants and lawyers, etc."

Words and Phrases
principal business

Rudiak v. The Queen, 2000 DTC 3901 (TCC)

bed and breakfast guest premises and owners' living area were physically separate

McArthur J. stated (at paras. 8-9):

The bed and breakfast guest premises and the Appellant's living area were physically separate. The business was carried on in the renovated confines of the original house. The Appellant and his wife's place of residence was wholly-contained within the newly-constructed addition to the rear of the business premises. The guests did not use this separate residence. The Appellant did use his private kitchen and laundry facilities and a small garage area for the business, but I find that this does not detract from the Appellant's position that it was minor in comparison to the overall picture. The fact remains that the guests did not use the kitchen, laundry area or office.

...I find on the facts that the living quarters of the Appellant and his wife were a separate apartment built at the back of the bed and breakfast area and constitute a self-contained domestic establishment. Obviously, there was some overlapping, and the Rudiaks used the bed and breakfast area occasionally as a personal living area. This was limited to less than 10% of a calendar year.

Sudbrack v. The Queen, 2000 DTC 2521, Docket: 98-2386-IT-G (TCC)

Extensive renovations were made to a house on the edge of a New Brunswick harbour in order that it could serve as a guest house. Five bedrooms with adjoining bathrooms were installed for guests. A new kitchen was added and three dining rooms. A private living area, representing 15% of the total area, was installed for the taxpayer (Mr. Sudbrack) and his wife consisting of a bedroom, living area, bathroom and two bedrooms in an attic for their daughters. In finding that this private living area was itself a self-contained domestic establishment, rather than the whole of the home constituting such an establishment, Bowman A.C.J. stated (at para. 19, 21-22):

[T]he separate living quarters of the family, which are essentially a separate apartment within the inn, constitute the self-contained domestic establishment. …

Moreover, if the inn as a whole is the "work space" that work space is "the individual's principal place of business". Accordingly there is, in effect, excised from the area to which the limitation in paragraph (a) applies the 85% of the inn in which the family does not live.

The work space within the "self-contained domestic establishment" (the family apartment) would consist of the kitchen which served the dual function as the family cooking space and the restaurant cooking space and the small room where Mr. Sudbrack kept his computer, records and other equipment for the purposes of the business.

The result of this is that the disallowances…under subsection 18(12)… will need to be reduced. I do not propose to attempt this calculation, but the amounts disallowed would need to be reduced by at least 85%.

Administrative Policy

27 October 2014 External T.I. 2012-0471391E5 F - Entreposage d'inventaire à domicile

separate samples storage room part of home office

A commissioned employee uses his home as his principal place of business. He has a home office as well as having inventory storage space either in a separate room or the same room for use in client presentations. CRA stated (TaxInterpretations translation):

[T]he home of the individual is his principal place of business. For purposes of subparagraph 18(12)(a)(i)…the storage space would form part of the self-contained domestic establishment which is his principal place of business if it is used only for business purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 8 - Subsection 8(13) inventory storage part of work place 92

2 March 1994 T.I. 940351 (C.T.O. "Office in Home Expenses Property Tax Commercial")

A statutory amendment would be required before RC could require proof of a commercial assessment before permitting a business a deduction in respect of a home work space.


Gael Melville, Lucie Champagne, Yves Plante, "Tax Considerations for the Newly-Self-Employed", 2011 Canadian Tax Journal, Vol 59, p. 843

General discussion including of issues arising from claiming CCA.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 23

Paragraph 18(12)(a)

Administrative Policy

S4-F2-C2 - Business Use of Home Expenses

Meaning of principal place of business

2.11 ... The word principal is not defined in the Act but in this context is generally understood to refer to the individual’s chief or main place of business .

Example 1

Mr. A is a building contractor who uses a work space in his home to perform various administrative activities that are required in his business operations. These activities include receiving work orders, bookkeeping, ordering supplies and preparing payrolls. The remaining activities of the business, the performance of contracts, are carried out at various customer locations. The work space in Mr. A’s home therefore represents his main place of business. Mr. A’s children often use the work space in the evening to do their homework.

A work space need not be used exclusively for the business in order to meet the principal place of business requirement outlined in ¶2.4(a). This means that the room used by Mr. A in his home to perform the administrative functions of his business will be considered Mr. A’s principal place of business. ...

Qualifying work space: regular and continuous

2.13 A work space will be used exclusively to earn business income if it is a segregated area, such as a room or rooms, that is used in a business and for no other purpose.

2.14 The Act does not specify what is meant by the wording meeting clients, customers or patients, so the CRA looks to the ordinary or dictionary meaning of these words. The term meet is generally defined as to come face to face with or to come into the presence or company of (someone) by chance or arrangement. The term meeting is generally defined as an assembly or gathering of people by chance or arrangement. It is the CRA’s view that this traditional interpretation of the term meeting, being those held in person, applies for purposes of subsection 18(12).

2.15 Whether a work space is used to meet clients, customers or patients with sufficient regularity and frequency to meet the requirement in ¶2.4(b) depends on the nature of the business activity and the facts of each situation . However, a work space in respect of a business which normally requires infrequent meetings or frequent meetings at irregular intervals will not meet this requirement.

2.16 A work space in the home that is used by a doctor to meet one or two patients a week is an example of a work space that would not be considered to be used on a regular and continuous basis for meeting patients. On the other hand, a work space used to meet an average of 5 patients a day for 5 days each week would clearly be used for that purpose on a regular and continuous basis. ...

Words and Phrases
principal meeting

Paragraph 18(12)(b)

Administrative Policy

S4-F2-C2 - Business Use of Home Expenses

Apportionment of expenses

2.18 The expenses should be apportioned between business and non-business use on a reasonable basis. A reasonable apportionment would be the area of the work space divided by the total finished area of the home (including areas such as hallways, bathrooms and kitchen). Other allocation methods may be considered reasonable depending on the particular circumstances. ...

2.20 Where a work space that is an individual’s principal place of business is also used for personal purposes, expenses should be apportioned between business and personal use. A reasonable basis of apportionment may be based on the number of hours a day a room is used for business purposes. If the business operates for only part of the week or year, expenses should be reduced accordingly.

Deduction of interest

2.22 In order to deduct interest on a mortgage or hypothec relating to a work space in the home, the interest must also meet the requirements for deduction under paragraph 20(1)(c). ...

2.25 Interest arising on borrowed money used to purchase a principal residence will not generally qualify for deduction... . However, where a portion of an individual’s home is used as a work space (that is, an income-earning use), a portion of the interest arising on the borrowed money used to purchase that home may be deductible as a work space expense. ...

Interest tracing

2.27 If borrowed funds on a line of credit secured by an individual’s principal residence are used to pay for outlays or expenses related to the work space (such as office equipment and furniture), the portion of interest on the line of credit relating to those purchases may be deductible as a work space expense. A deduction is subject to the apportionment requirement described in ¶2.18 - 2.20 if the funds are used for something that benefits the home and the work space (such as the purchase of a new furnace or air-conditioner). ...

Apportionment of repairs

2.28 ...[M]aintenance or minor repairs that relate to the work space as well as other areas of the home - for example, regular maintenance or minor repairs to the home furnace or air-conditioner or the purchase of household cleaning supplies...should generally be apportioned as described in ¶2.18 - 2.20.

Expenses incurred in earning income from property

2.45 Subsection 18(12) limits the deduction of expenses related to the use of a work space in the home in computing an individual’s income from a business. Subsection 18(12) does not limit the deduction of expenses incurred to earn income from property. This means, for example, that subsection 18(12) would not apply to expenses incurred for a work space in the home used for the management and accounting activities related to a non-business rental property.

Paragraph 18(12)(c)

Administrative Policy

S4-F2-C2 - Business Use of Home Expenses

Business-by-business carryforward

2.42 ...

Example 5

... Mrs. D decides to close her nail salon business in Year 4 and replace it with a home-based wedding planning business. The business use of home expenses carried forward from Year 3 of $500 cannot be applied against income from the new wedding planning business. This is because business use of home expenses carried-forward can only be applied to income from the same business in respect of which the work space in the home was used in the prior year(s).

Subsection 18(13) - When s. (15) applies to money lenders

Administrative Policy

5 February 1990 T.I. (July 1990 Access Letter, ¶1315)

The relationship between ss.18(13) and 20(1)(l) is discussed.