Deductibility of acquisition interest (s. 20(1)(c))

A buyer who borrows to purchase shares or assets meets this rule when deciding how the loan and the purchase are arranged. Subparagraph 20(1)(c)(i) allows interest paid or payable under a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property, excluding borrowed money used to acquire property whose income would be exempt or to acquire a life insurance policy. The deduction is the lesser of that interest and a reasonable amount in respect of it.

What the CRA’s folio adds

• The borrowed money must be traced to a current use that qualifies, and the onus is on the taxpayer to show it
• The CRA says a reasonable expectation of capital gains alone does not meet the purpose of earning income
• For shares, the CRA generally considers interest on money borrowed to buy common shares deductible on the basis that there is a reasonable expectation of dividends when they are acquired, though not in every fact situation
• The folio says the purpose test is not met where a corporation has asserted that it does not pay dividends, none are expected in the foreseeable future, and shareholders must sell to realize their value

Ask a tax adviser how the loan, the borrower and the target’s dividend policy fit this test. See can I deduct interest on a loan to buy a business.