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: Is interest incurred by a non-resident partner deductible by the non-resident for the purpose of computing income from a business carried on by the non-resident partner in Canada under subparagraph 115(1)(a)(ii) of the Act.
Position: Question of fact that must be considered on a case by case basis. However, assuming the all tests of paragraph 20(1)(c) are met and based on the facts since the partnership only carries on a business in Canada the deduction is against a source that is income from a business income and not income from another source such as property.
Reasons: The law - the main facts in this situation are that the funds are contributed to the partnership as equity and such funds are used by the partnership in its business carried on in Canada.
XXXXXXXXXX 1999-001100
Attention: XXXXXXXXXX
April 19, 2000
Dear Sir:
Re: Source of Income Earned by a Non-resident Partner
This is in reply to your facsimile letters of March 8 and March 30, 1999, wherein you requested our views under the Income Tax Act (the "Act") in the following situation.
In your letters you describe a situation where a non-resident individual is a member of a partnership that carries on a business in Canada through a permanent establishment. The non-resident is subject to income tax in Canada under Part I of the Act on his/her share of net income of the partnership as required by subsection 2(3) and subparagraph 115(1)(a)(ii) of the Act. The non-resident borrows money that is contributed to the partnership as equity and such funds are used by the partnership in its business carried on in Canada. You ask whether in computing the non-resident's net income from the partnership for the purposes of the Act the interest expense incurred by the non-resident partner will be deductible from a source of income that is business income.
Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. Although we are not able to comment specifically on the situation described in your letter we can offer the following general comments which we caution may or may not be applicable to your fact situation.
It remains a question of fact as to whether any expense incurred by a partner outside the partnership is deductible from the partner's share of income from that partnership under the Act. Consideration must be given to whether the partner will have a reasonable expectation of profit as a result of making the expenditure. Moreover, an allocation of the particular expenditure to each income source may be required where the partnership earns income from more than one source or type. Thus a review of all the facts, including the terms of the particular partnership agreement and any other pertinent information, would likely be required before a determination could be made.
Notwithstanding the above, where a partnership carries on a business in Canada a partner of such a partnership will be considered to be carrying on a business in Canada for the purposes of the Act. Where such a partnership carries on no other income earning activity (i.e., it does not earn income from any other source or type under the Act, such as income from a property) each partner's share of income from that partnership can only be from a source that is from a business for the purposes of the Act (see Technical News No. 3). In such circumstances, where a non-resident partner borrows money that is used by the partnership for the purpose of earning income from its business the interest expense will generally be deductible by the non-resident partner under paragraph 20(1)(c) of the Act (assuming all the other tests in that paragraph are met) and such deduction would be wholly applicable to that particular business source for the purposes of computing the non-resident partner's income referred to in subparagraph 115(1)(a)(ii) of the Act. However, if the non-resident partner incurs interest expense to earn partnership income that is income from a non-business source, such as from property, the interest would not be deductible in computing the non-resident partner's income referred to in subparagraph 115(1)(a)(ii) of the Act. If the partnership has income from both a business source and a non-business source, an allocation of the interest expense between the two sources may be required depending on the facts of the particular situation. Any interest expense allocated to the non-business source would not be deductible under subparagraph 115(1)(a)(ii).
We would also like to point out that consideration of other rules in the Act, such as the "at risk rules" in respect of limited partnerships in section 96 or "the general anti-avoidance rule" in subsection 245(2) of the Act could only be considered once all the facts of a given situation are known.
Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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