Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether interest on loan (secured by rental property) to buy principal residence is deductible
Position: No
Reasons: IT Act and caselaw
September 16, 2004
EDMONTON TSO HEADQUARTERS
Denise Dalphy, LL.B.
Attention : Esther Rousseau Financial Industries Division
(613) 941-1722
2004-008817
Subject: Interest Deductibility
This is in reply to your facsimile transmission of July 26, 2004 whereby you forwarded a copy of an enquiry about interest deductibility.
In particular, the question relates to whether a case decided by the Supreme Court of Canada would permit interest to be deductible in a situation where a taxpayer borrows money on the security (mortgage) of a previously unmortgaged rental property owned by the taxpayer, and uses the borrowed money to purchase a principal residence.
In 2001, the Supreme Court of Canada released a decision in the case, The Queen v. Singleton, 2001 DTC 5533. In this case, the taxpayer, who was a partner in a law firm, withdrew money from his capital account with the firm. [This was not a loan to the taxpayer, but it was a return to the taxpayer of his capital.] The taxpayer used this money to buy a home. On the same day, the taxpayer borrowed money from a bank and used the borrowed money to contribute to his capital account with the law firm. The Court found that the interest was deductible because the money that was borrowed for a direct eligible use, namely to make a capital investment in the taxpayer's law firm, from which the taxpayer could expect to earn income.
In the situation where a taxpayer borrows money to invest in a principal residence, the direct use of the borrowed money is an ineligible use of money for the purpose of the interest deductibility rules because the borrowed money would not be directly used to generate income from a business or property.
We hope this opinion will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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