Chapter History S3-F6-C1, Interest Deductibility
The purpose of a Chapter History page is to highlight any amendments to the information contained in a chapter of an income tax folio, including amendments to the information originally contained in an interpretation bulletin that has been cancelled and replaced with a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).
Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended.
Update September 3, 2020
The French version of the Chapter has been revised to improve readability. The following wording changes have also been made to the French Chapter:
¶1.36, ¶1.42 and ¶1.44 have been revised to use the word “traçabilité” instead of “lien” to better reflect the concept of tracing/linking.
¶1.53 has been modified in the third bullet to replace the term “dettes” [debts] with “pertes” [losses].
Update March 18, 2016
¶1.63.1 and ¶1.63.2 have been added to confirm that the tracing/linking principles discussed in ¶1.44, and the flexible linking comments discussed in ¶1.38, for borrowed money may also apply to share acquisitions and amalgamations/wind-ups for the purposes of subparagraph 20(1)(c)(ii).
Update November 26, 2015
Minor changes have been made to improve the usability of the income tax folios:
- the Summary section has been moved to the top of each folio chapter to be more immediately visible and helpful to readers;
- the Application and Reference sections have been moved to the end of the Chapter which is more appropriate for administrative content of this nature. However, these sections now appear in the Table of contents for easy access;
- the statement that folios are only available in electronic format has been moved to the end of the Application section; and
- the words “as promulgated under the Act” in connection with the Income Tax Regulations have been removed from the Application section, in the interest of using plain language.
Update July 16, 2015
Throughout the French version of the Chapter, general revisions have been made to improve readability. The following changes have also been made to the Chapter.
Example 9 has been revised for greater clarity to note that Property #1 is an income-earning property and Property #2 is not an income-earning property.
¶1.98 has been revised to include a reference to the liquidator of a succession.
Update March 6, 2015
Income Tax Folio S3-F6-C1, Interest Deductibility, replaces and cancels Interpretation Bulletin IT–533, Interest deductibility and related issues.
In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below.
Legislative and other changes
¶1.2 has been added to describe the nature of a participating payment and the broad differences between returns on debt and equity.
¶1.3 (formerly included in ¶2 of IT-533) has been amended to clarify that participating payments may qualify as interest within the meaning of paragraph 20(1)(c) where the conditions described in (a), (b), and (c) of ¶1.3 are satisfied.
¶1.4 has been added for greater clarity with respect to the condition described in (c) of ¶1.3.
¶1.5 (formerly included in ¶2 of IT-533) has been amended to clarify that participating payments are not deductible under paragraph 20(1)(e) by virtue of subparagraph 20(1)(e)(iv.1).
¶1.6 (formerly included in ¶3 of IT-533) has been amended to remove the reference to Interpretation Bulletin IT-265, Payments of income and capital combined, as this publication has been cancelled.
¶1.7 (formerly included in ¶4 of IT-533) has been amended to include legislative references where applicable and to remove the reference to the Federal Court of Appeal Decision in Gifford, which was subsequently appealed to and heard by the Supreme Court of Canada.
¶1.8 has been added to note the general limitation for outlays on account of capital contained in paragraph 18(1)(b) as well as to describe the relevance of paragraph 20(1)(c) for purposes of deducting interest on account of capital.
¶1.10 and 1.11 have been added for the convenience of readers to outline relevant portions of paragraph 20(1)(c) that are discussed throughout the Chapter.
¶1.12 has been added to highlight the conditions contained in the pre and post-amble of paragraph 20(1)(c) that are discussed in ¶1.13 to 1.20.
¶1.13 to 1.18 (formerly included in ¶5 to 6 of IT-533) have been revised and expanded to include discussion of the general limitation that applies to the deduction of contingent liabilities or amounts (including contingent interest) pursuant to section 143.4. Section 143.4 was added by S.C. 2013, c. 34, s. 295(1), applicable to tax years ending on or after March 16, 2011. Information concerning contingent liabilities has also been updated to reflect the CRA’s views.
¶1.21 has been added to identify some of the terms used in subparagraph 20(1)(c)(i) that are discussed later in the Chapter.
¶1.22 to 1.24 (formerly included in ¶8 of IT-533) concerning the meaning of borrowed money has been revised to expand on the discussion of lender and borrower relationships and the unpaid purchase price of property.
¶1.37 has been added to expand on the discussion provided in ¶1.36 with respect to linking borrowed money to its current use.
¶1.40 and Example 7 have been added to provide additional discussion and examples concerning the linking of borrowed money to its current use.
¶1.43 and Example 10 have been added to address the approach to tracing/linking where a taxpayer makes a repayment of borrowed money in respect of an account that has been used for eligible and ineligible uses.
¶1.57 has been added to note relevant jurisprudence on the subject matter.
¶1.59 (formerly included in ¶11 of IT-533) has been expanded to discuss the treatment of interest on borrowed money used to acquire certain policies that are excluded from the definition of a life insurance policy under subsection 20(2.2). Some of this information was previously contained in Interpretation Bulletin IT-355, Interest on Loans to Buy Life Insurance Policies and Annuity Contracts, and Interest on Policy Loans (Cancelled).
¶1.60 has been added to discuss the treatment of interest on borrowed money used to acquire an annuity contract under subparagraphs 20(1)(c)(i) and (iv).
¶1.62 has been added to help readers distinguish between amounts that are deductible under subparagraphs 20(1)(c)(i) and (ii).
¶1.64 (formerly included in ¶28 of IT-533) has been revised to clarify that the difference in wording between subparagraphs 20(1)(c)(i) and (ii) only exists in the English version of the Act.
¶1.66 to 1.68 (formerly included in ¶30 of IT-533) have been expanded to discuss subparagraphs 20(1)(c)(iii) and (iv) in greater detail and updated to reflect the CRA’s views.
¶1.69 and 1.70 (formerly included in ¶31 of IT-533) have been expanded to discuss in greater detail the deductibility of interest on borrowed money used to acquire investments.
¶1.71 to 1.75 (formerly included in ¶32 of IT-533) have been revised and expanded to reflect the CRA’s views and to clarify the entities within a corporate group who may undertake a loss consolidation arrangement.
¶1.81 to 1.83 (formerly included in ¶5 of IT-533) concerning the deductibility of compound interest have been expanded.
¶1.84 to 1.86 have been added to discuss the deductibility of interest on a policy loan under paragraphs 20(1)(c) and (d), which was previously described in Interpretation Bulletin IT-355 (Cancelled).
¶1.87 to 1.90 have been added to address the deductibility of interest arising with respect to 10/8 policies, and the introduction of subsection 20(2.01), which was added by S.C. 2013, c. 40, s. 11(4), effective for tax years ending after March 20, 2013.
¶1.92 (formerly included in ¶35 of IT-533) has been expanded to provide an additional example of a property that may be provided as security for a loan.
¶1.93 (formerly included in ¶36 of IT-533) has been amended to remove the reference to Gifford which is no longer pending and expanded to discuss further the deduction of interest expense on amounts payable for service costs.
¶1.99 (formerly included in ¶41 of IT-533) has been revised for greater clarity.
¶1.100 (formerly included in ¶42 of IT-533) has been expanded to include reference to subsection 18.3(3), interest on a liability of an entity that is a stapled security, added by S.C. 2013, c. 40, s. 10(1).
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