Principal Issues: [TaxInterpretations translation]
Deductibility of interest on borrowings used to acquire mutual fund units
Position: General position of the Agency
Reasons: No specific situation
December 19, 2000
Sherbrooke Tax Services Office Headquarters
Audit 445 A. St-Amour, CA
(613) 952-1764
Attention: Mr. Pierre Houde
2000-004919Interest charges on loans used to acquire mutual fund units
This is in response to your memo of September 26, 2000, asking for our opinion on the deductibility of interest expense on a loan to purchase mutual fund units that gives rise only to capital gains on disposition.
Whether mutual fund units were acquired for the purpose of earning income is a question of fact and each situation must be examined on its own facts. During a telephone conversation (St-Amour/Houde), you indicated that you do not currently have a specific situation. Consequently, we can only offer general comments. However, these comments may not apply to a specific situation.
It should be noted that in interpretations E2000-0036435 and E1999-0014010, we stated that following the Ludco 99 DTC 5153 decision, the Agency's position on interest deductibility had not changed. It also stated that the general position regarding the deductibility of interest on loans to acquire common shares applies to loans used to acquire mutual fund units. In interpretation E9727585, we stated that interest on money borrowed to acquire mutual fund units is generally deductible. In that interpretation, we also stated that interest and dividends are included in computing income from property, while capital gains are excluded.
As stated in several roundtables (see Question 39 of the 1981 Canadian Tax Foundation Conference Roundtable, Question 24 of the 1987 Corporate Management Tax Conference Roundtable and Question 12 of the June 1999 Technical Advisors Conference in File F9913090), the Agency is of the view that, in general and barring exceptional circumstances, interest on money borrowed to acquire common shares is deductible, taking into account that the potential return to the shareholder may exceed the cost of borrowing. However, it may be determined in particular situations that it is not reasonable to expect a potential profit in excess of the interest so that the interest would not be deductible under paragraph 20(1)(c). We have no guidelines for isolating those situations and we are of the view that each situation must be analyzed on its own facts.
Furthermore, we are of the view that for an expense to be deductible, there must be a source of income from a business or property. In our view, there is no source of income in circumstances where the facts show that there is no profit or expectation of profit.
As indicated in paragraph 5 of Interpretation Bulletin IT-445, subsection 9(3) of the Act excludes a capital gain from income from property. Consequently, the increase in the value of the property cannot be used to support a deduction under paragraph 20(1)(c). This position was confirmed by the Supreme Court of Canada in Bronfman 87 DTC 5059:
“Not all borrowing expenses are deductible. Interest on borrowed money used to produce tax exempt income is not deductible. Interest on borrowed money used to buy life insurance policies is not deductible. Interest on borrowings used for non‑income earning purposes, such as personal consumption or the making of capital gains is similarly not deductible.”
Consequently, notwithstanding our general position stated above, we are of the view that interest on money borrowed and used to acquire common shares or mutual fund units may not be deductible where there is no expectation of profit from the investment.
We hope you find these comments of assistance. We would be pleased to consider your request at a later date if you have a specific case.
for the Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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