Section 20.1

Subsection 20.1(1) - Borrowed money used to earn income from property

Administrative Policy

S3-F6-C1 - Interest Deductibility

Disappearing source rules

1.41 In general terms, the disappearing source rules in section 20.1 apply where borrowed money ceases to be used for the purpose of earning income from a capital property (other than real or immovable property or depreciable property), and the borrowed money can no longer be traced to any income earning use. Generally, under these rules, the borrowed money that is no longer linked to any income-earning use is nonetheless deemed to be used for the purpose of earning income. This enables interest on this amount to continue to be deductible. ...

10 June 1996 External T.I. 9611135 - LOSS OF SOURCE INTEREST DEDUCTIBILITY

Where a partnership is dissolved and the partners receive real property from the partnership in satisfaction of their partnership interests, and the adjusted cost base of the partnership interests at the date of dissolution of the partnership and the fair market value of the property received in satisfaction of the partnership interests is less than the original cost of the partnership interests, the decrease in the adjusted cost base of the partnership interests would not be considered to be lost because of a decline in value of property for purposes of s. 20.1 if such decrease is attributable to drawdowns by the partners of capital from the partnership, given that the borrowed money used initially to acquire the partnership interests thus would be traceable to an ineligible use. If the decrease in the adjusted cost base of the partnership interests is a result of losses of the partnership, the amount of borrowed money used to acquire the consideration for purposes of s. 20.1(1)(b)(i) would be based on the fair market value the property received in satisfaction of the partnership interests and the original cost of the partnership interests.

18 July 1995 Internal T.I. 9508157 - LOSS OF SOURCE

Interest paid by an individual on a loan made to honour a guarantee made by the individual of borrowings made by a Canadian-controlled private corporation would not be deductible under s. 20.1 because the money borrowed by the individual to honour his guarantee would not be borrowed to be used to earn income from a business or from property given that the corporation was insolvent at the time and had ceased to carry on business. Similarly, if the individual makes interest payments on the corporate loan, such interest would not be deductible because the individual making the payments has not used the borrowed money.

8 December 1994 External T.I. 9422085

"Where an amount is deemed by virtue of section 80.5 of the Act, to be interest paid in respect of the year pursuant to a legal obligation to pay interest on borrowed money for purposes of paragraph 20(1)(c) of the Act, and the source of income subsequently disappears, and the loan is refinanced, subsections 20(3) and section 20.1 of the Act should be applicable. Consequently ... the deemed interest on the portion of the borrowed money that has been lost should be deductible."


Chang, Briant, "Interest Deductibility: New Loss of Source of Income Rules", 1995 Canadian Tax Journal, Vol. 43, No. 1, p. 154.

Subsection 20.1(2)

Paragraph 20.1(2)(c)

See Also

Moras v. The Queen, 2019 TCC 111 (Informal Procedure)

interest that accrued personally on debt incurred to fund business transferred to a corporation was deductible

Prior to the transfer of his accountancy practice in 2007 to his corporation, the taxpayer borrowed under a home equity line of credit (in the name of him and his wife, the co-owner) in order to fund $93,545 in alleged expenses of that practice. At the hearing, the Crown accepted 66.5% (or $62,280) of those expenses (e.g., for rent and software subscriptions) but continued to consider other claimed expenses such as interest expense and poorly documented travel expenses, to be non-deductible. The taxation years under appeal were 2013 and 2014, for which CRA denied the taxpayer’s deduction of $2,750 and $2,555, respectively, of interest that had continued to accrue (and be paid by the taxpayer) on the still-outstanding line of credit (which, since the transfer of the business, had been used solely to pay interest thereon).

Before allowing the deduction of the interest expenses in full, Favreau J stated (at paras. 16-17):

Section 20.1 ... applies when a borrower ceases to use the borrowed money for the purpose of earning income when the source of income disappears. Section 20.1 has the effect of allowing interest on borrowed money to continue being deductible in computing the taxpayer’s income. To that end, paragraph 20.1(2)(c) specifically provides that the portion of the borrowed money outstanding when the business ceases operating shall be deemed to be used by the taxpayer at any subsequent time for the purpose of earning income from the business.

By conceding that the interest expenses paid in respect of the loans taken out to finance expenses totalling $62,280 ... the respondent recognized … that the appellant carried on a business during that period and that the expenses totalling $62,280 had been incurred in relation to his commercial activities.