Tax and regulatory
ITA 20(1)(c)
Also known as: Income Tax Act 20(1)(c), Interest deductibility
Income Tax Act paragraph 20(1)(c). The legal basis for interest deductibility in Canadian residential investing. Interest on borrowed money is deductible when the funds are used for the purpose of earning income from a business or property.
The four-part test CRA applies: (1) there is a legal obligation to pay the interest, (2) the interest is paid in the year, (3) the borrowed money was used to earn income from a business or property, and (4) the amount is reasonable. The third part is where most strategies live and die: the dollar borrowed has to be the dollar invested, in a defensible structure, with clean tracing.
ITA 20(1)(c) is what makes Investment Leverage, Cash Damming, and the Debt Swap work. The legal basis is settled (Singleton v. Canada, 2001); execution is everything. Tax-deductibility decisions need a CPA who can review your specific T776 history.
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