Vancouver District Office-September 1991
Q.1
We understand that no deduction under paragraph 20(1)(c) is available for interest expense incurred by a shareholder of a corporation who borrows funds at interest to make a capital contribution to the corporation. We understand that this conclusion is based on the requirement in paragraph 20(1)(c) that requires property to be acquired. It occurs to us that this is an inequitable result that does not recognize economic reality. Would Revenue Canada please comment?
A.
Paragraph 20(1)(c) restricts the circumstances where interest on borrowed money is deductible to cases where borrowed money is used to earn income from a business of the borrower or to acquire an income producing property. Funds borrowed by a shareholder which are used to contribute surplus to a corporation are not used for either of these purposes. Therefor, as noted in the question and in paragraph 3 of IT-445, interest on such borrowings is not deductible under paragraph 20(1)(c) of the Income Tax Act in its current form. This result of the application of the existing law was acknowledged by the Joint Committee on Taxation of The Canadian Bar Association and The Canadian Institute of Chartered Accountants in its August 1990 Submission to the Minister of Finance on the issue of Deductibility of Interest. The tax policy concerns referred to in the question were also raised by the Joint Committee in their recommendations to the Minister of Finance.
Prepared by K Donnelly Leasing and Financing Section