AP 7-1 (Interest Deductibility - Four Cases)

Each of the following independent cases involves interest expense and determination of whether the interest is deductible for income tax purposes.

CASE D: Thomson Fraser has always dreamed of owning a Rolls Royce SUV, which costs $525,000. His bank has agreed to finance the purchase with a loan that bears interest at 7.5%

However, he can borrow the same amount using a margin loan against the investments in his substantial trading account. The interest rate on such borrowing would only be 4%. He decides to take advantage of the lower interest rate to purchase the car. Since the loan is connected to his income earning investments as collateral, he assumes that he will be able to claim a deduction for any interest. Is he correct? Explain your conclusion. If you conclude that the interest would not be deductible, is there some tax advice you could provide that would allow the interest to be deductible?