Principal Issues: [TaxInterpretations translation] Where two spouses are co-owners of a residence and co-debtors of a mortgage on that residence, can one spouse, in consideration for shares acquired from the other spouse, assume the portion of the mortgage previously borne by the other spouse and deduct the interest on that portion of the mortgage?
Position: General comments.
Reasons: Whether a taxpayer has a legal obligation to pay interest on an amount payable for property acquired is a question of mixed fact and law that can only be resolved after a review of all the contracts involved.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 24
Interest deductibility in respect of an assumed mortgage
At the Federal Tax Roundtable at the 2000 APFF Conference, the following question was posed to the CRA:
“Two spouses are 50% -50% co-owners of their residence, and each assumes 50% of the mortgage on this residence. In addition, the wife owns 100% of the shares in a corporation. She sells some of the shares to her husband, with the fair market value of these shares being equivalent to 50% of the mortgage on the residence. As consideration for the shares that he acquires, the husband is to assume the 50% of the mortgage that the wife used to assume. Can the husband deduct the interest on 50% of the mortgage under subparagraph 20(1)(c)(ii) of the Act?” (footnote 1)
The CRA responded as follows:
“The question of whether a property was acquired for the purpose of gaining income from it or gaining income from a business within the meaning of subparagraph 20(1)(c)(ii) of the Act is a question of fact that can only be determined after examining all the relevant circumstances. In a situation like that above, it would be necessary to examine all the facts surrounding the acquisition of the shares as well as the relevant documents.
A certain amount of uncertainty currently surrounds this question as a result of the ruling by the Federal Court of Appeal in Singleton v. The Queen, 99 DTC 5362, which CCRA has appealed to the Supreme Court of Canada. We are therefore unable to comment further.” (footnote 2)
In 2009, in the context of a question relating to the Lipson judgment (footnote 3), the CRA indicated that, in the context of a spousal sale that has been elected not to be subject to the subsection 73(1) rollover, the individual realizes the capital gain on the transferred shares and the attribution rules in subsection 74.1(1) do not apply. The CRA has indicated that loan interest would be deductible by the acquiring spouse under paragraph 20(1)(c), provided that all the conditions of that provision were satisfied (footnote 4).
Questions to the CRA
In the situation described in the question raised in 2000, and assuming that the sale of Madame's shares to Monsieur is not subject to subsection 73(1) rollover, would the fact that Monsieur assumes the portion of the mortgage previously borne by Madame change the CRA's answer on interest deductibility to Monsieur?
CRA Response
Generally, it is the CRA's view that the assumption of a debt as consideration for the acquisition of a property constitutes an amount payable for property acquired for the purposes of subparagraph 20(1)(c)(ii). In order for interest to be deductible under that subparagraph, it must, among other things, be paid or payable pursuant to a legal obligation to pay interest on an amount payable for property acquired for the purpose of gaining or producing income from it or from a business.
In order to answer the question, it must be established whether Monsieur, in assuming a portion of Madame's mortgage loan as consideration for the acquisition of the shares, incurred a new debt for which he was not previously liable and whether he had a legal obligation to pay interest that he was not previously legally required to pay. To this end, it is necessary to determine what the respective legal obligations of both spouses were before the transfer of the shares and what their respective legal obligations were after the transfer of the shares.
Whether a taxpayer has a legal obligation to pay interest on an amount payable for property acquired is a question of mixed fact and law that can only be resolved after a review of all the contracts involved. As indicated in the response to the question posed in 2000, a review of all the facts surrounding the acquisition of the shares, as well as a review of the documentation relevant to the determination of the legal obligations of both spouses before and after the transfer of the shares, would be necessary.
Mélanie Beaulieu
(613) 957-9226
October 8, 2010
2010-037355.
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 "Federal Tax Roundtable”, Conference 2000, Montreal, Association de planification fiscale et financière, 2001, pp. 51:1-44, question 4.1, pages 51:27-28 and CANADA REVENUE AGENCY, Technical Interpretation 2000-0037955 (hereinafter the "question raised in 2000").
2 Id.
3 [2009] 1 SCR 3; 2009 DTC 5016 (Fr.); [2009] 1 CTC 314.
4 "Financial Strategies and Instruments Roundtable", 2009 Conference, Montreal, Association de planification fiscale et financière, 2010, pp. 47:1-57, question 18, pages 47:46-47 and CANADA REVENUE AGENCY, Technical Interpretation 2009-0327071C6.