The federal Department of Finance has released draft proposals regarding the deductibility of interest and other expenses.

These proposals, along with an income tax interpretation bulletin (IT-533, Interest Deductibility and Related Issues) released by the Canada Customs and Revenue Agency, form the government’s coordinated response on the deductibility of interest and other expenses.

The proposed legislative amendments and draft interpretation bulletin are aimed at clarifying how the income tax system links the deductibility of certain expenses and losses to a taxpayer’s prospects for profit, objectively determined.

The proposals include specific Income Tax Act rules that require that there be a “reasonable expectation of profit” from a business or property for a taxpayer to realize a loss from the business or property, and that make clear that profit in this sense does not include capital gains.

Finance says that these measures will reaffirm many current practices that support the deductibility of interest, including those relating to the deductibility of interest on money borrowed to purchase common shares.

The package includes legislative proposals and explanatory notes. These proposals are intended to have effect for taxation years beginning after 2004.

The Department of Finance invites the public and tax professionals to comment on the proposals by December 31.