Canadians - Interest Deductibility

Effective for tax years commencing after 2004, CRA has implemented rule changes regarding the deductibility of investment interest. In general terms, the proposed amendments would deny losses claimed by a taxpayer if the taxpayer did not have, in that taxation year, a reasonable expectation of earning a cumulative profit in connection with the business or property that generated the expense. Capital gains are not to be considered when determining whether a taxpayer has a reasonable expectation of earning a cumulative profit.

Under the draft legislation, a taxpayer will be considered to have realized a non-capital loss in respect of a business or property for income tax purposes only if, in the taxation year, it is reasonable to assume that the taxpayer will realize a cumulative profit from the business or property over the duration of:

• In the case of a business, the time that the taxpayer has carried on the business, or can reasonably be expected to carry on the business.

• In the case of a property, the time that the taxpayer has held the property or can reasonably be expected to hold the property.

In summary, the draft proposals incorporate three key elements:  (1) the concept of cumulative profit; (2) the relevant time period for determining the cumulative profit; and (3) an objective test of reasonableness.

 

 

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