5-903215
Dear Sirs:
Re: Deductibility of interest expense after a change in use of real property
We are writing in reply to your November 5, 1990 letter in which you requested a ruling on the deductibility of interest pursuant to subparagraph 20(1)(c)(i) after a change in use of real property.
The particular circumstances referred to in your letter would involve a taxpayer who purchases a residence for his personal use which he inhabits as his principal residence. At the time of purchase the taxpayer makes a cash down payments of 25% of the purchase price and finances the balance with a mortgage loan at market interest rates from a commercial lending institution. In a later year, the taxpayer ceases to occupy the residence and commences to rent it at market rents. At that time there is still a balance owing on the mortgage loan which the taxpayer continues to pay in the same manner as previously.
You have requested our confirmation that, after commencing to rent the property, the interest expense incurred and paid in respect of the mortgage loan will be deductible pursuant to subparagraph 20(1)(c)(i) in computing rental income.
Although we are unable to comment specifically on a particular proposed arrangment, other than in response to a fully documented request for an advance income tax ruling, we can advise you of our general view that, if all other requirements of paragraph 20(1)(c) are met, a taxpayer who uses or intends to use borrowed money for an ineligible purpose, but later uses the funds to earn non-exempt income from a business or property, would be entitled to a deduction of interest expense for the current eligible use.
Our comments are provided in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate