October 14, 1988 A. Seidel (613) 957-8960
Dear Sirs:
This is in reply to your letter, dated June 30, 1988, regarding the deductibility of interest expense under paragraph 20(1)(c) of the Income Tax Act (the "Act").
The case of The Queen vs. P. B. Bronfman Trust (87 DTC 5059) confirmed that it is the current use of funds and not the original use of funds that must be considered. In order to determine whether borrowed funds have been put to an eligible use, it is necessary to trace the use of funds through successive deployments.
In this regard it is our view that, provided the requirements of paragraph 20(1)(c) of the Act are otherwise met, where one income source is disposed of and the proceeds are used to acquire another income source, interest on the borrowed money that was used to acquire the first income source will continue to be deductible to the extent that the borrowing is reflected in the cost of the new income source.
In a news release on September 29, 1986, Finance Minister Michael Wilson announced that the current interest deductibility rules will be extended to apply to investment loans made before 1990. Should you have any questions concerning amendments to the Act in this regard they should be directed to the Department of Finance.
While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.
Yours truly,
for Director Financial Industries Division Rulings Directorate