12 May 2000 External T.I. 1999-0012165 - Deductibility of Carrying Charges

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether carrying charges on funds borrowed to acquire an interest in a Canadian limited partnership by a non-resident would be deductible, specifically where, for the years in question, there was no income from the partnership.

Position:

It depends on a finding on whether the funds were borrowed for the purpose of earning income from a business or property and whether there as a reasonable expectation of profit from the partnership.

Reasons:

The provisions of paragraphs 18(1)(a), 20(1)(c) and subparagraph 115(1)(a)(ii) of the Act.

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F. B. Fontaine
May 12, 2000

Dear Sir:

Re: Deductibility of Carrying Charges

This is in reply to your letter forwarded to us by the Ottawa Tax Services Office concerning the deductibility of carrying charges on funds borrowed by a non-resident taxpayer to buy a limited partnership interest. We assume that you are specifically referring to interest as the carrying charge.

Whether or not the situation you described is a completed or proposed transaction, paragraph 22 of Information Circular 70-63R entitled Advance Income Tax Rulings (the "Circular") outlines the procedure to be followed in respect of such transaction. Accordingly, while we are unable to provide the income tax effects of the particular situation, we are prepared to offer the following general comments:

Provided that a partner has a reasonable expectation of profit from a partnership, interest paid by a Canadian resident partner either on funds borrowed to acquire a partnership interest or to contribute to a partnership for use by the partnership to earn income from business is deductible by the partner under paragraph 20(1)(c) of the Income Tax Act (the "Act") in computing income from a source that is income of the partnership.

A non-resident partner carrying on business in Canada is taxable under subparagraph 115(1)(a)(ii) of the Act on income from that business computed in accordance with Part I of the Act and paragraph 20(1)(c) applies equally to the non-resident partner as it does to a resident partner.

The above comments represent an expression of opinion which, as indicated in paragraph 22 of the Circular, is not an advance income tax ruling and, accordingly, is not binding on the Canada Customs and Revenue Agency.

Yours truly,

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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