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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, November 10, 2002
In 2001, the Canada Customs and Revenue Agency (CCRA)
lost two legal cases. Both involved the deduction
of interest on borrowed funds and were dealt with
in the Supreme Court of Canada.
As a result, CCRA subsequently conducted a review of
its interpretations and administrative policy on interest
deductibility. It recently made public its perspectives
in a presentation to the Canadian Tax Foundation.
CCRA has outlined 18 proposals which change the landscape
pertaining to the deductibility of interest incurred
on borrowed funds. These proposals affect a wide variety
of taxpayers such as individuals, trusts, estates, small
and large companies. Virtually everyone who may deduct
interest on borrowed capital.
The discussion paper on the proposed CCRA interpretations
is worthy reading for all borrowers. Being aware of
the proposals is helpful in planning a strategy for
an investor's specific situation.
Please note that the proposals are not yet the CCRA
accepted interpretation and policy. There could also
be additional revisions on some proposals before they
become the new standard.
Investors should be aware of the potential changes
as they may affect a specific situation. The time frame
for implementation of the proposals could well be early
2003. Hence, time is of the essence.
The proposals are important because they affect several
areas of interest deductibility. A key to all the proposals
is that the requirement that borrowers keep track of
the borrowed funds so that each loan can be traced to
a particular purpose will be relaxed. The concept of
linking the borrowed money will become the new approach.
Mutual fund investors will be most interested in the
proposal on borrowing to acquire common shares. Corporate
borrowers may need to revisit borrowing strategy to
pay dividends or make loans to employees and shareholders.
Investors who are called to honour a personal loan
guarantee, and do so with borrowed money, can also be
affected.
Some areas of interest deductibility will stay the
same. Two non-deductible examples are loan interest
incurred on RRSP loans and on mortgages to purchase
a principal residence.
CCRA is inviting taxpayers and their advisors to make
comments and submissions on the proposals until December
31, 2002. It may be valuable to consult your advisors
to review the proposals vis-a-vis your specific situation.
Here is a suggested approach to the new interest deductibility
landscape:
1. Become aware of the content of the 18 proposals.
2. Determine how they may affect your specific situation.
3. Assess what may have to be changed in your strategy.
Anyone with loans outstanding, or contemplating one,
will be impacted in some fashion. It is best to become
informed of the potential changes on the horizon. You
can be assured that there is something in the proposals
for every borrower.
The content of the 18 CCRA proposals can be viewed
on the home
page. To receive a paper copy, please leave me your
address particulars and my office will send it to you.
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