Principal Issues: [TaxInterpretations translation] Would the interest paid or payable by a corporation on a loan from a financial institution be deductible pursuant to subparagraph 20(1)(c)(i) in a situation where the loan was used to repay a non-interest bearing loan?
Position: Yes.
Reasons: Subsection 20(3) would deem the money borrowed from the financial institution to have been used by the corporation for the purpose for which the previously borrowed money was used. Thus, to the extent that it was a qualifying purpose, the interest would be deductible under subparagraph 20(1)(c)(i).
2006-017373 XXXXXXXXXX Guy Goulet, CA, M.Fisc. (819) 986-8098 October 31, 2006
Dear Sir,
Subject: Section 20(3) of the Income Tax Act
This is in response to your letter of February 21, 2006, requesting our comments regarding interest deductibility where a corporation borrows money from an arm's length financial institution to repay a non-interest bearing loan that it had used to earn income from an active business.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act")
Your Question
You wish to know if the interest paid or payable by the corporation (using the method regularly followed in computing its income) on the loan from the financial institution would be deductible pursuant to subparagraph 20(1)(c)(i).
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of an advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. However, we can offer the following general comments which may not be fully applicable in a particular situation.
Subparagraph 20(1)(c)(i) allows a deduction for interest where all the conditions set out therein are satisfied. In particular, the amount to be deducted must be paid or payable in satisfaction of a legal obligation to pay interest on borrowed money used to earn income from a business or property. In addition, subsection 20(3) provides, inter alia, that for the purposes of paragraph 20(1)(c), money borrowed by a taxpayer to repay money previously borrowed is deemed to have been used for the purpose for which the previous borrowing was used.
We are of the view that in the above situation, the money borrowed from the financial institution by the corporation would be deemed to have been used by the corporation for the purpose for which the previously borrowed money was used by virtue of subsection 20(3). Thus, to the extent that the repaid loan was used for the purpose of earning income from a business or property, the interest on the money borrowed from the financial institution would be deductible under subparagraph 20(1)(c)(i).
Finally, please note that our comments do not constitute an advance income tax ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding on the CRA with respect to any particular situation.
We hope that our comments will be of assistance.
Best regards,
Ghislain Martineau
Manager
Financial Sector and Exempt Entities Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch