Principal Questions: 1) A trust borrows money to acquire a rental property. The trust distributes the rental property to one of its beneficiaries which assumes the debt attached to the rental property. 2) An individual borrows money to acquire a rental property. The individual dies and the rental property is the object of a legacy by particular title in favour of his child who assumes the debt attached to the rental property. In each scenario, whether the amount of the debt assumed would constitute "an amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of producing income from a business" for the purpose of subparagraph 20(1)(c)(ii).
Position: Provided that the debt is assumed as a condition of acquiring the property, the amount of the debt assumed would constitute "an amount payable for property acquired" for the purpose of subparagraph 20(1)(c)(ii). However, deductibility under subparagraph 20(1)(c)(ii) depends on the facts and circumstances of each case.
Reasons: Wording of the Act.
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2014
2014 APFF CONFERENCE
Question 8. Deductibility of interest
Situation 1
A trust holds a commercial rental property charged with a hypothec entered into by the trust in order to proceed with the purchase of the property. The criteria in subparagraph 20(1)(c)(i) are satisfied and the trust deducts interest in computing its income. The trust distributes the property in the form of a capital distribution to an individual, A, who also assumes the balance of the hypothec loan, pursuant to subsection 107(2). As a result of the distribution, A uses the property to derive income or income from a business.
Situation 2
An individual, B, holds a commercial rental property charged with a hypothec contracted by B in order to proceed with the purchase of the property. The criteria in subparagraph 20(1)(c)(i) are satisfied and B deducts interest in computing B's income. On the death of B, the property is the subject of a legacy by particular title to the child of B (Child). The legacy is charged with the hypothec and, consequently, Child assumes the balance of the hypothec loan. Child uses the property to derive income or income from a business.
Questions to the CRA
a) In Situation 1, does the CRA consider that the interest on the hypothec loan assumed by A to be interest paid or payable on "an amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of producing income from a business" within the meaning of subparagraph 20(1)(c)(ii) and that it is, therefore, deductible from the income of A?
b) In Situation 2, does the CRA consider the interest on the hypothec loan assumed by Child to be interest paid or payable on "an amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of producing income from a business" within the meaning of subparagraph 20(1)(c)(ii) and that it is, therefore, deductible from the income of Child?
CRA response to Question 8(a)
To the extent that assumption by A of the hypothec loan charging the property is a condition of the distribution of the property by the trust, the CRA is of the view that the balance owing under the hypothec loan constitutes "an amount payable for property acquired" for the purpose of subparagraph 20(1)(c)(ii). However, the question of whether the interest paid or payable by A is deductible is a question of fact which requires an analysis of all the relevant facts and circumstances surrounding the acquisition of the property.
CRA response to Question 8(b)
Similarly, the CRA considers that the balance owing under the hypothec loan assumed by Child in the circumstances constitutes "an amount payable for property acquired" for the purpose of subparagraph 20(1)(c)(ii). However, the question of whether the interest paid or payable by Child is deductible is a question of fact which requires an analysis of all the relevant facts and circumstances surrounding the acquisition of the property.
Marc Séguin
(514) 620-8562
October 10, 2014
2014-053814