Prior to the Amendments

The interposed entity rules support the interest limitation rules outlined in subpart DH of the ITA. The rules deny interest deductions for taxpayers who indirectly hold DRP through an interposed residential property holder (IRPH) and borrow money to acquire ownership interests in or become a beneficiary of the IRPH.

An IRPH is a company or trust that has DRP as a percentage of its total assets that exceeds a specified percentage. The rules deny interest deductions for a person based on the IRP percentage of the IRPH. Section DH 6 contains the rules for calculating the IRP percentage of an IRPH. Section DH 6(1) sets out the following formula to calculate the IRP percentage:

disqualified assets ÷ total assets.

Section DH 6(2)(a) provides that “disqualified assets” is the value of the IRPH’s DRP.

However, while property described in sections DH 4(1) to (3) is expressly excluded from “disqualified assets” in section DH 6, property described in sections DH 4(4) to (6) is not. ). Therefore, taxpayers who borrow money to buy such property through an IRPH will not be allowed to deduct interest under current legislation. This result was unintended, and the proposed amendment rectifies this.

Proposed Amendments

The amendment will ensure that all disallowed residential property (DRP) that is excluded from the interest limitation rules is also excluded from the calculation of the Interest residential property percentage of an IRPH.

The proposed amendment excludes DRP from the definition of disqualified assets in S DH 6 of the ITA. This ensures that DRP that is subject to an exemption is not treated as a disqualified asset.

Effective Date

The proposed amendment will take effect on 27 March 2021. 

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