Principal Issues: A taxpayer borrows money to acquire shares of a corporation. To pay interest on the first loan, the taxpayer borrows money under a second loan. Is the interest on the second loan deductible under paragraph 20(1)(c)?
Position: Yes
Reasons: Previous position taken in Ruling's interpretations.
XXXXXXXXXX 2007-025494 L. Carruthers, CA November 15, 2007
Dear XXXXXXXXXX:
Re: Interest Deductibility - Second Loan
This is in reply to your letter dated October 1, 2007, wherein you asked our assistance to clarify the interest deduction that would be allowed pursuant to the Income Tax Act (the "Act") in a hypothetical scenario where a taxpayer borrows money to acquire shares of a corporation. The loan bears a reasonable rate of interest and the interest paid or payable on this loan is fully deductible under paragraph 20(1)(c) of the Act. In order to pay all or part of the interest on this first loan, the taxpayer borrows money from a second lender. The second loan also bears a reasonable rate of interest.
Our Comments
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in a manner set out in Information Circular 70-6R5. As stated in paragraph 22 of IC 70-6R5, written opinions are not advance tax rulings and, accordingly, are not binding on the Canada Revenue Agency (the "CRA"). The following comments are, therefore, of a general nature only.
As indicated in Income Tax Ruling's documents 2005-0116661C6 and 2004-007034, in our view, interest paid or payable in the year (following the method regularly used by a taxpayer in calculating income) on the second loan is deductible in calculating income of a taxpayer from a business or property pursuant to paragraph 20(1)(c) of the Act if the interest on the first loan is deductible pursuant to that provision in calculating the income of the taxpayer from that business or property.
We trust that our comments will be of assistance.
Yours truly,
R.A. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate