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: interest deductibility
Position: general comments
Reasons: ITA
XXXXXXXXXX 2005-012112
Denise Dalphy, LL.B.
(613) 941-1722
March 29, 2005
Dear XXXXXXXXXX:
Re: Interest
We are writing in reply to your e-mail of March 15, 2005 wherein you requested an opinion concerning the income tax consequences of borrowing money.
You have described the following situation. You plan to buy a used van in XXXXXXXXXX and you will use it in your business as XXXXXXXXXX. XXXXXXXXXX will borrow money at prime rate from his personal line of credit and he will lend the money to you. You will repay the loan by paying XXXXXXXXXX $XXXXXXXXXX a month, which will include interest computed at XXXXXXXXXX% on the loan, which will exceed the prime rate.
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Nonetheless, we shall provide some comments of a general nature.
Where a person ("Borrower #1") borrows money at prime rate and then lends it to another person ("Borrower #2") and charges Borrower #2 a higher, but reasonable, rate of interest (such as XXXXXXXXXX%), the interest income (XXXXXXXXXX%) will be included in computing the income of Borrower #1, and a deduction may be taken by Borrower #1 for the interest that he paid at the prime rate.
If the purpose of Borrower #2's borrowing is for both business and personal reasons, Borrower #2 must determine what percentage of his use of the property acquired with the borrowed money (e.g a vehicle) was for the purposes of earning income from the business. If, for example 50% of the use of the property was for business reasons, 50% of the interest paid by Borrower #2 would be deductible by him in computing his income from the business. You may find it helpful to refer to Interpretation Bulletin IT-533, Interest Deductibility and Related Issues. Further information that may be of assistance is described in Interpretation Bulletin IT-521R, Motor Vehicle Expenses Claimed by Self-Employed Individuals.
You may also wish to read two Guides: RC4070, Guide for Canadian Small Businesses and T4002, Business and Professional Income. These Interpretation Bulletins and Guides can be found on our website, www.cra.gc.ca under Forms and Publications/Document Type [Income Tax Interpretation Bulletins or Guides].
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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© Her Majesty the Queen in Right of Canada, 2005
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