19 December 2002 External T.I. 2002-0148705 - Interest Deduction by a Non-Res 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 CCRA.

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

Principal Issues: Whether a non-resident partner can deduct interest expense on money borrowed to acquire an interest in a partnership that earns rental income from a property located in Canada?

Position: If an election under section 216 of the Act is made, the non-resident partner can claim an interest expense deduction under paragraph 20(1)(c).

Reasons: Intent of section 216 and paragraph 20(1)(c).

XXXXXXXXXX 2002-014870
Sophie Chatel
Attention: XXXXXXXXXX

December 19, 2002

Dear Sirs/Mesdames:

Re: Section 216 and subparagraph 20(1)(c)(i) of the Income Tax Act (the "Act")

We are writing in response to your letter dated June 24, 2002, in respect of the above-noted provisions. You have asked whether the interest deduction under subparagraph 20(1)(c)(i) is available to a non-resident partner who borrows money to acquire an interest in a partnership. The partnership earns rental income from a real property located in Canada and the non-resident elects to file a section 216 return.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

It is a question of fact whether or not a partnership is carrying on business in Canada for the purposes of the Act. In this response, we assume that the partnership is not carrying on business in Canada for the purposes of section 115 of the Act.

In this scenario, the rental income earned by the non-resident partner from the property in Canada would not be subject to Part I tax as subsection 115(1) does not deal with passive investment income from property in Canada. Instead, the gross rental income is subject to non-resident withholding tax pursuant to paragraph 212(1)(d), together with subsection 212(13.1) of the Act which deems a partnership (other than a Canadian partnership) to be a non-resident person for the purpose of Part XIII.

Alternatively, as you note, the non-resident partner may elect under section 216 to file an income tax return and pay tax under Part I on the partner's share of the income of the partnership, as though the non-resident person were a person residing in Canada, but without being allowed any deductions from that income for the purpose of computing taxable income (i.e., Division C deductions).

It is our view that, in calculating the partner's share of the income from the partnership for the purpose of a Section 216 return, the non-resident partner is entitled to deduct the interest expense incurred on the borrowed money used to acquire the partnership interest pursuant to subparagraph 20(1)(c)(i) of the Act. Although the partnership interest per se does not generate income, the partnership interest allows the partner to earn income from real property of the partnership.

We hope our views are of assistance.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings and Interpretations Directorate
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