4 May 2005 External T.I. 2005-0126791E5 - Interest deductibility - common shares

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: Is interest on money borrowed to invest in common shares deductible?

Position: Interest on money borrowed to invest in common shares is deductible under subparagraph 20(1)(c)(i) of the Act if the borrowed money was used for the purpose of earning income. There has to be a reasonable expectation of income at the time the investment was made.

Reasons: Previous position in paragraph 11 of IT-533, Interest Deductibility

2005-012679
XXXXXXXXXX G. Moore
(613) 957-8982
May 4, 2005

Dear XXXXXXXXXX:

Re: Paragraph 20(1)(c) of the Income Tax Act

This is in response to your letter of April 21, 2005, inquiring about the deductibility of interest on money borrowed to purchase common shares.

You describe a situation in which a taxpayer has borrowed money from a bank to invest in common shares of a non-resident limited liability company. You are asking if the interest on the money borrowed to invest in these shares is deductible.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

The CRA's general views regarding interest deductibility are contained in Interpretation Bulletin IT-533, Interest Deductibility.

As discussed during the telephone conversation (Moore/XXXXXXXXXX) of April 27, 2005, subparagraph 20(1)(c)(i) of the Income Tax Act provides that interest on money borrowed is deductible if it is used for the purpose of earning income from a business or property. If borrowed money is used to acquire an investment such as common shares, a determination must be made as to whether there is a reasonable expectation of income at the time the investment is made. Normally, however, we consider interest costs in respect of funds borrowed to purchase common shares to be deductible on the basis that there is a reasonable expectation, at the time the shares are acquired, that the common shareholder will receive dividends. Nonetheless, each situation must be dealt with on the basis of the particular facts involved.

We trust that these comments will be of assistance.

Yours truly,

Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch