I just want to make sure regarding finance charges occurred on a bond statement. If there is property in a trust and an active bond loan, can the interest paid/finance charges be used as an expense even if the trust does not derive income from renting out
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
We don’t agree that the amounts can be deducted merely because there is a property involved. We accept that the beneficiaries in the trust, don’t have a vested right to amounts that accrue to the trustees.
The principle, with regard to any interest-bearing debt (we leave instruments out for the moment) is that an amount of interest incurred during a year of assessment, must be deducted from the income of that person derived from carrying on any trade, if that amount is incurred in the production of the income. See section 24J(2) of the income Tax Act in this regard.
We submit that what is relevant here is “the income of that person derived from carrying on any trade” requirement. In order for the taxpayer to make a deduction it is necessary that the taxpayer must be able to meet the burden of proof that a trade was being carried on, and then that the amount of the expense was incurred in the production of the income (the interest) derived from that trade.
That requires an enquiry to determine the purpose of obtaining the funding. Put differently, one must determine what did the money, obtained on strength of the bond, fund. If the trust acquired fixed properties that are not used for trade purposes, the deduction will not be available.