An individual, who is an RRSP annuitant, borrows the “Mortgage Loan” from the RRSP, with a principal residence mortgage granted in favour of the RRSP as security. The Mortgage Loan would be administered by an approved lender under the National Housing Act and would be insured as required by Reg. 4900(1)(j.1) by an approved private insurer. The Mortgage Loan proceeds would be used to make an interest-free shareholder loan to a corporation (the “Corporation”) in which the individual held shares and controlled, with the Corporation paying off a corporate line of credit. Is the interest on the Mortgage Loan deductible? CRA stated:
If the interest-free loan is made to a wholly-owned corporation and the Shareholder Loan is used to pay off a corporate line of credit where the interest is currently deductible by the Corporation under paragraph 20(1)(c)...such that it increases the Corporation’s income-earning capacity (i.e., by reducing the Corporation’s interest expense) and the shareholders’ potential future dividend income from the Corporation, then the interest may be deductible under paragraph 20(1)(c)… .