20 June 2000 External T.I. 2000-0020335 - Interest Expense - Non-Resident Partner

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 interest expense incurred by a non-resident partner is deductible by the non-resident in computing income from a business carried on in Canada.

Position: General Comments.

Reasons: Question of fact depends on all relevant information pertaining to the situation.

XXXXXXXXXX 2000-002033
B. Kerr
Attention: XXXXXXXXXX

June 15, 2000

Dear Sirs:

Re: Paragraphs 2(3)(b), 20(1)(c) and 115(1)(a) of the Income Tax Act (the "Act")

This is in response to your letter of April 13, 2000, wherein you requested our views concerning the deductibility of interest expense incurred by a non-resident partner in computing income from a business carried on in Canada.

You have referred to our letter dated July 14, 1997 - file 9716025 where it was stated that interest payable in respect of the year by a non-resident corporation pursuant to a legal obligation on borrowed money from another non-resident corporation used to acquire a partnership interest in Canada would not be deductible in Canada. You have indicated that it is your understanding that the opinion expressed therein is no longer our view and have therefore asked that we confirm that the interest expense would be deductible.

Our Comments

It is a question of fact 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. In addition, an allocation of the particular expenditure to each income source may be required where the partnership earns income from more than one source. A review of all the facts, terms of the particular partnership agreement and any other pertinent information would be required.

Generally, however, 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, each partner's share of income from that partnership can only be from a source that is a business for the purposes of the Act. In such circumstances, where a non-resident partner borrows money that is used to acquire an interest in a partnership for the purpose of earning income from the partnership business the interest expense will generally be deductible by the non-resident partner under paragraph 20(1)(c) of the Act 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 expense 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) of the Act.

We trust that these comments will be of assistance.

Yours truly,

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