TO Assessing and Enquiries Directorate
FROM - Small Business and General Division R.B. Day 957-2136
P. McNally Director Enquiries and Taxpayers Assistance Division
SUBJECT: Minister's Correspondence
We are writing in response to your memorandum of April 28, 1989, wherein you requested our opinion as to whether interest paid on money borrowed to acquire an Income Averaging Annuity Contract (IAAC) would be considered to be an amount "deducted in computing his income for the year from property" for purposes of the definition of "investment expense" in subsection 110.6(1) of and the computation of his "cumulative net investment loss" (CNIL) for 1988.
Our Comments
In response to informal enquiries received in this Division, we have expressed the view that the interest paid is not laid out to earn income from property and should not be included in interest expense for purposes of the CNIL calculation. As a result, no amounts need be included in either interest expense or investment income for purposes of the CNIL calculation.
We do, however, have some reservations about this position from a technical point of view. IAAC payments are included in income under paragraph 56(l)(d) and section 300 of the Regulations prohibits the deduction of the capital element permitted by paragraph 60(a). The interaction of these three provisions indicates that there is an interest income element present in an IAAC, or similar annuity payments. As a result it would appear that the interest element represents income from property and the interest paid is laid out to earn property income. It would appear, therefore, that for purposes of the CNIL calculation the interest paid should be included in "investment expense" and the interest income element should be included in "investment income".
We will be corresponding with Current Amendments and Regulations Division in this regard.
In view of the above, we suggest that you provide XXXX with an interim reply indicating that the matter he has raised is under review.
Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch