7 November 1996 External T.I. 9633095 - LOW INTEREST LOANS AND DECUTIBILITY

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:

Interest Deductibility

Position:

General position in IT-445

Reasons:

Question fits within guidelines covered in IT

XXXXXXXXXX							963309

Attention: XXXXXXXXXX

November 7, 1996

Dear Sirs:

Re: Technical Interpretation

This is in reply to your letter of September 27, 1996 in which you request a technical interpretation on whether interest expense incurred on a bank loan is deductible.

The situation described in your letter is an actual fact situation and written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2. Where a completed transaction is involved, the enquiry should be addressed to your local District Tax Services Office. Consequently, we can only offer the following general comments.

Interpretation Bulletin IT-445 (copy enclosed) outlines the Department's position concerning the deductibility of interest expense where a shareholder borrows funds and reloans those funds interest-free or at less than a reasonable rate of interest in non-arm's length circumstances. As noted in paragraph 3 of IT-445, the Department's general position is that interest expense incurred on borrowed money is generally not deductible in whole or in part when that money ... is not used to earn income directly by the borrower in his business or from a property acquired with that borrowed money. The fact that the borrower may earn income indirectly, for example through increased dividends from a corporation to whom an interest-free loan has been made, is not sufficient cause to permit the borrower to deduct interest on his liability.

However, there is an exception to this general position contained in paragraph 7 of IT-445 provided certain conditions listed in the bulletin are met. It would be a question of fact whether your client meets the exception to the general position in determining whether the interest incurred by the shareholder is deductible pursuant to paragraph 20(1)(c) of the Income Tax Act.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch