Question 3 (25 marks)

Each of the following independent cases involves interest payments and the issue is interest deductibility.

Case A

Sue Saunders borrowed $420,000 and invested the entire loan proceeds in publicly traded securities. After 8 months, the securities value dropped to $200,000. At this point, Sue Saunders sold the securities and used the proceeds to reduce the loan to $220,000. Since she no longer owns the securities, can Sue Saunders deduct the interest on the remaining loan amount of $220,000? Explain your conclusion.

Case B

Connie Storm borrowed $90,000 and used the funds to acquire an income producing property. She then sold the property for $300,000. She used the proceeds to acquire two properties: property A cost $130,000 and property B cost $170,000. How will the $90,000 in borrowing be linked to the two properties?

Case C

Dom Durham borrowed $600,000 and used the funds to purchase an income producing property. Later on, he sold the property for $240,000. He used the $240,000 to acquire two properties: property A cost $80,000 and property B cost $160,000. How will the $600,000 in borrowing be linked to the two properties?

Case D

Bob Barns owned securities that had a current fair market value of $700,000. Using his margin balance available from his stockbroker, he borrowed $125,000 to finance a watch purchase to give to his father. During the time period when the margin loan was outstanding, he paid $6,600 interest on it. Can he deduct this interest against the $17,000 income earned during this period on his securities? Explain your conclusion.

Case E

Jonathan Darby owned his home for many years and, over this period of time, had completely paid off the mortgage. Given the low interest rates that are available on mortgages, he negotiated a 10-year, $450,000 variable rate mortgage, with an interest rate of 2.65%. Jonathan Darby then invested the entire $450,000 in publicly traded securities. Would the interest on the mortgage be deductible? Explain your conclusion.