Introducing Tax Foresight’s Interest Deductibility Navigator
Is an interest expense deductible from income for tax purposes under the Income Tax Act (ITA)?
Tax Foresight’s recently released Interest Deductibility Navigator answers that question with a series of inquiries that determine the context in which the interest expense arises, whether the expense is on account of capital or income and which provision of the ITA, if any, permits it. In addition, the Interest Deductibility Navigator confirms whether certain amount limits in the ITA apply to a deductible interest expense.
- The Interest Deductibility Navigator considers over 40 different provisions of the ITA that relate to the deductibility of interest expenses.
- Questions are user-responsive, meaning they vary based on previous inputs. A navigation can consist of one question or more than 25 questions, depending on your specific scenario.
- At every step, the Interest Deductibility Navigator contains links to the relevant provisions of the ITA and applicable case law.
- A comprehensive explanation with links to relevant resources supports every navigation.
The Interest Deductibility Navigator is organized in five sections:
- Source of Interest Expense
- Income or Capital Outlay
- Specific Exclusions or Inclusions
- Paragraph 20(1)(c) Test
- Limitations on Amount
Section 1 confirms whether the interest expense arises from the taxpayer’s business, property, office, employment, or another activity. Section 2 confirms whether the loan to which the interest expense relates added to the taxpayer’s financial capital or was on account of the taxpayer’s income. Section 3 confirms whether the interest expense is addressed by a specific inclusionary or exclusionary provision of the ITA, and if it is not, Section 4 determines whether it passes the general deductibility test at paragraph 20(1)(c) of the ITA. Finally, Section 5 determines whether specific amount limits apply to the interest expense in question.
Why a Navigator?
With limited exceptions, interest expenses are not deductible under the ITA unless a specific rule permits it. Throughout the ITA, there are many rules, and associated cases, that specifically permit or deny the deduction of an interest expense or limit the amount of the deduction. Their applicability can depend on who the taxpayer is, their purpose in obtaining a loan and incurring interest, when, where and how they used the loan and how they repaid it, among other considerations. Determining which rules apply to a particular scenario is important and necessary, but can also be time consuming and tedious. By dividing the determination into sections and consolidating the rules into a short series of questions in each section, the Interest Deductibility Navigator helps streamline this analysis in a user-friendly and dynamic manner.