Principal Issues: [TaxInterpretations translation] A taxpayer borrows money and the interest is deductible pursuant to paragraph 20(1)(c). To pay the interest, he takes out a second loan. Is the interest on this second loan deductible?
Position: Yes.
Reasons: The conditions for the application of paragraph 20(1)(c) are satisfied.
XXXXXXXXXX 2004-007034 Michel Lambert, CA, M. Fisc. December 16, 2004
Dear Sir,
Subject: Deduction of interest on one loan to pay interest on another
This is in response to your letter of April 2, 2004 concerning the above subject.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
A taxpayer borrowed money and the interest on that loan is deductible pursuant to paragraph 20(1)(c). To pay the interest, the taxpayer took out a second loan. You asked whether the interest on that second loan is deductible.
We are of the view that interest paid in the year or payable for the year (depending on the method ordinarily used by the taxpayer in computing income) on the second loan will be deductible in computing income from a business or property pursuant to paragraph 20(1)(c) if the interest on the first loan is deductible pursuant to that paragraph from income from that business or property.
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding.
Best regards,
Section Manager
for the Director of the Directorate
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch