Principal Issues: Under the circumstances, is interest on borrowed money paid to an RRSP, for which the taxpayer is the beneficiary, deductible?
Position: Yes
Reasons: The borrowed money will be used by the taxpayer for the purpose of earning income from a business or property.
XXXXXXXXXX 2011-041376 L.M. Carruthers, CA
January 12, 2012
Dear XXXXXXXXXX ,
Re: Interest Deductibility
This is in reply to your email of July 10, 2011, and further to your telephone conversation with Lori Carruthers on July 14, 2011, in which you asked our assistance in clarifying whether the interest paid by a taxpayer (the "Taxpayer") to her self-directed registered retirement saving plan ("her RRSP") would be deductible for purposes of the Income Tax Act (the "Act"). We also acknowledge your follow-up correspondences dated July 26 and October 12, 2011.
You described the following hypothetical scenario in your original email:
- The Taxpayer is the beneficiary of her RRSP and owns rental properties outside of her RRSP.
- The Taxpayer is currently deducting, as an expense on her tax return, the interest she pays to an arm's length bank for money she borrowed and used to fund the purchase price of the rental properties (the "Original Loan").
- The Taxpayer will repay the Original Loan by taking out a non-arm's length mortgage funded by money from her RRSP (the "Second Loan").
You asked whether, in the hypothetical scenario described above, the Taxpayer would be able to deduct, as an expense on her tax return, the interest paid to her RRSP.
Our Comments
Your correspondence appears to relate to a proposed situation involving a specific taxpayer, however, you did not provide that taxpayer's identification number and the proposed transactions you described were somewhat general in nature. As explained in paragraphs 5, 6 and 16 of Information Circular IC70-6R3, an Advance Income Tax Ruling, which is binding upon the Canada Revenue Agency and the cost of which is borne by the taxpayer benefitting from the ruling, will only be considered when such information is included in the request. That being said, and in accordance with paragraph 22 of IC70-6R3, we are able to give you the following written technical interpretation of the income tax implications of the hypothetical scenario described above.
Paragraph 20(1)(c) of the Act allows a taxpayer to deduct simple interest paid or payable in the year on borrowed money used by the taxpayer for the purpose of earning income from a business or property. In the hypothetical scenario described above, the Taxpayer is currently deducting interest on the Original Loan because she used the proceeds from that loan to acquire the rental properties from which she is earning income.
Subsection 20(3) of the Act provides, in general terms, that where a taxpayer uses borrowed money to repay money previously borrowed, the new borrowed money is considered to be used for the purpose for which the original borrowed money was used. So, in the case of the hypothetical scenario described above, pursuant to subsection 20(3) of the Act, the Second Loan is considered to have been used by the Taxpayer to fund the purchase price of the rental properties. Therefore, given that the interest paid or payable on the Original Loan was deductible on the basis that it was used for the purpose of earning business or property income from the rental properties, interest on the Second Loan that is used to repay the Original Loan will continue to be deductible as long as the rental properties continue to be held by the Taxpayer for the purpose of earning income from a business or property.
We trust that these comments will be of assistance to you.
Yours truly,
R.A. Albert, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate