Canada: Miss Take Part 2: Restructuring For Interest Deductibility

Last Updated: October 17 2014
Article by Keith Vincent

When we first met Miss Take a couple of years ago, she had made the unfortunate error of borrowing to acquire a new principal residence. She did not realize that the interest on the borrowed funds would not be deductible against the income from her rental property (her former principal residence). Even though the borrowing was against the equity in her rental property, the direct use of the funds was to acquire a new personal home, so the interest on this borrowing was not deductible.

As that previous article mentioned, some restructuring to obtain interest deductibility is possible with the right planning. But once the error has been made, can it be fixed?

Miss Take did not want to involve other individuals to help her with her planning, so she decided to investigate other options. After talking with her advisor, they came up with the following plan:

  • Miss Take incorporates a new company (Newco) and becomes Newco's sole shareholder.
  • Miss Take transfers her old home to Newco and as consideration; Newco issues a promissory note equal to the value of the property. Let's assume that this transaction is happening shortly after the conversion to a rental property. The gain realized by Miss Take on the conversion is sheltered with her available principal residence exemption (see here for more information on the principal residence exemption.)
  • Newco borrows from the bank an amount equal to the promissory note.
  • Newco uses the borrowed funds to repay the promissory note owing to Miss Take.
  • Miss Take uses the funds received from Newco to repay the mortgage used to acquire her new principal residence.

What has been accomplished here? Newco now has an interest-bearing loan owing to the bank. Even though Newco did not use borrowed funds to acquire the rental property, it used the borrowed funds to repay an amount payable for property acquired for the purpose of earning income. As such, the bank borrowing is deemed to be used for the same purpose as the previous debt owing to Miss Take and therefore, the interest is deductible by Newco against the rental income.

Before making this decision, Miss Take and her advisor had a number of things to consider:

  • The legal costs of incorporation
  • The ongoing accounting costs of the annual tax filings
  • The tax rates on the rental income earned inside of the corporation vs. the personal income tax rates (the costs / savings will depend on the province of residence) – this is a key consideration
  • The costs of transferring the property to Newco. If legal title to the property is transferred, some provinces charge a transfer tax. In British Columbia, this is often avoided by only transferring the underlying "beneficial interest" and leaving legal title with the original owner. The original owner acts as "bare trustee" for the beneficial owner under a "bare trust" agreement.

All of these considerations need to be compared to the savings from the interest deduction.

What if some time has gone by between when Miss Take converted her old home to a rental property and the time she decides to transfer it to a corporation? If she sells the rental property to Newco at its fair market value and takes back a promissory note equal to that value, she'll realize a gain to the extent that the current value exceeds the value when it was converted to a rental property. Furthermore, if she has claimed capital cost allowance (CCA) - known as depreciation for tax purposes - on the rental property, she'll have to "recapture" the CCA previously claimed and bring it into her income. Depending on the value, this could result in a large tax bill with no cash to pay it (for simplicity, let's ignore certain tax elections that can apply when a principal residence is converted to a rental property).

Is there anything that she can do to avoid this tax hit? Let's assume that when she converted her old residence to a rental property, it was worth $250,000 and that now the value has gone up to $300,000. Let's also assume that she hasn't taken any CCA. A straight sale of the property to Newco would result in a capital gain of $50,000 with the resulting income tax.

Instead, Miss Take can use one of the "rollover" provisions found in Section 85 of the Income Tax Act. These provisions are designed to allow for a disposition of property without the income tax consequences that would ordinarily result from the transfer of property at fair market value. Instead of Newco issuing a promissory note for $300,000, it issues a promissory note for $250,000. Since Miss Take has to get value equal to the value of the property that was transferred, Newco also issues preferred shares having a redemption value of $50,000. Miss Take and Newco file a joint election to deem Miss Take to have disposed of the property for $250,000. Since her proceeds and her cost are both $250,000, she does not realize any gain. The shares that she receives are worth $50,000 but they have no tax cost, so if she were to sell them, she would realize a capital gain of $50,000 at that point. From Newco's perspective, it acquires the rental property at a cost of $250,000 and so when it sells the property, it will realize a gain of $50,000 and pay tax on that gain. Like in the other example, Newco could then borrow $250,000 from its bank and use those funds to repay the promissory note owing to Miss Take. Miss Take would then use the funds to pay down her mortgage.

Incorporation can also be an effective estate planning tool. As the sole shareholder of Newco, Miss Take's estate value will continue to increase as the value of the rental property increases in value. On her passing, she will be considered to have disposed of the shares of Newco at their fair market value (unless they pass to a surviving spouse). Instead, Miss Take could set up Newco with other family members as shareholders. If Miss Take just owns fixed-value preferred shares, her tax liability is fixed and can be dealt with proactively (for example, with life insurance). Future growth in the value of Newco accrues to other shareholders and on an ongoing basis, income splitting with the other shareholders can be achieved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.