Does interest paid on a loan need to be proportionately allocated to all of the streams of income?

Author: SAIT Technical

Q: Does interest paid on a loan need to be proportionately allocated to all of the streams of income (even non-taxable income such as donations and dividends received) or do we only need to allocate the interest on the loan account to the "trade" streams of income (such as rental income, interest received etc.). We asking this in respect of a trust tax return.

Our client has the following sources of income: consulting, interest, donations from trustee, rental income and dividends received. Our client has a large loan account on which interest is paid by the trust.

A: An expense needs to be apportioned where it has been incurred in general and not directly in respect of an income producing activity. In respect of debt, in our view the interest expense would be allocated pro rata as the money was utilized or if used in general on a per income source bases if that is a reasonable basis for apportionment. You would therefore have to determine on which activity the loan was expended and whether such activity produced income.

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