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:
Does the position taken by CCRA at the 2002 CTF on deduction of interest, change our views on whether money borrowed to replace capital contributions meets the conditions set out in clause 149(1)(o.2)(ii)(C) or 149(1)(o.2)(ii.1)(C) of the Act?
Position: No
Reasons:
The CTF paper on deduction of interest does not apply for these purposes. The borrowing will not satisfy the requirements if it is for the purpose of replacing capital invested in real property.
2003-000727
XXXXXXXXXX 2003-002696
W. C. Harding
December 19, 2003
Dear Sirs:
Re: XXXXXXXXXX
Advance Tax Ruling - 149(0.2)(ii)(c)
This is in reply to your electronic message of January 29, 2003 regarding the above-noted subject and technical interpretation E2002-0134885 and your request for an advance income tax ruling with respect to the same matter, dated June 26, 2003.
As discussed during our various telephone conversations on this matter, we are not prepared to provide the rulings requested and as advised in our message of December 11, 2003 (XXXXXXXXXX/Harding), we have now concluded that you have withdrawn your request. Nevertheless, we are prepared to provide the following general comments with respect to the issues raised.
Paragraph 149(1)(o.2) of the Income Tax Act (the "Act") sets out the requirements that a pension corporation, as described in that provision, must satisfy. Clauses 149(1)(o.2)(ii)(C) and 149(1)(o.2)(ii.1)(C) provides that the corporations can only borrow money where it is solely for the purpose of earning income from real property (in the case of a corporation to which subparagraph (ii) applies) or Canadian resource properties (in the case of a corporation to which subparagraph (ii.1) applies).
CCRA released a paper at the 2002 Canadian Tax Foundation (available on the internet at http://www.ccra-adrc.gc.ca/tax/technical/incometax/presentation-e.html) that discusses the deductibility of interest in certain situations. The Paper has since led to the publication of CCRA's Interpretation Bulletin IT-533 Interest Deductibility and Related Issues dated October 31, 2003.
Paragraph I of the paper provides that CCRA will now allow the deduction of interest paid on a debt that is used to replace capital that is withdrawn from a corporation by virtue of a redemption of shares or a return of capital. Given this position, you asked if pension corporations may now borrow funds to replace capital used to acquire real property and still satisfy the requirements of paragraph 149(1)(o.2) of the Act.
The Agency's positions as expressed in the paper and the Interpretation Bulletin are based on decisions reached by the courts on the deductibility of interest under paragraph 20(1)(c) of the Act. They do not address and were not intended to address the interpretation of the provisions of clauses 149(1)(o.2)(ii)(C) and 149(1)(o.2)(ii.1)(C) of the Act. Accordingly, our views as expressed in technical interpretation E 2002-0134885 have not changed as a result of the paper's publication. Whether money is borrowed solely for the purpose of earning income from real property or Canadian resource property, as the case may be, or an interest therein, is a question of fact. However, in our view the conditions of clause 149(1)(o.2)(ii)(C) or 149(1)(o.2)(ii.1)(C) would not be satisfied where borrowed money is used to replace capital contributed by the shareholders of the corporation, including situations where such capital contributions were originally used to invest for the purpose of earning income, in real property, or Canadian resource property.
An invoice for the time spent considering your request will be forwarded under separate cover.
Yours truly,
Roberta Albert, CA
Manager
Deferred Income Plans Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
??
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2003
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2003