17 December 2004 External T.I. 2004-0084881E5 - Deductibility of interest on assumed debt

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.

Principal Issues: Deductibility of interest on assumed debt.

Position: If a taxpayer has assumed another person's indebtedness as part of the purchase price of an asset acquired by the taxpayer interest paid on the assumed debt is generally deductible pursuant to subparagraph 20(1)(c)(ii).

Reasons: The taxpayer will have "an amount payable for property acquired" and thus, interest paid on that assumed indebtedness will be deductible to the extent provided for in subparagraph 20(1)(c)(ii).

XXXXXXXXXX 							2004-008488
P. Diguer, CGA
December 17, 2004

Dear XXXXXXXXXX:

Re: Subparagraph 20(1)(c)(ii) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter dated July 06, 2004 in which you request our views on the deductibility of interest on assumed debt.

In particular you describe a situation where a taxpayer (New Trust) has assumed another person's (A Co) indebtedness (Loan payable to Finco) as part of the purchase price of an asset (Note payable by Trust) acquired by New Trust.

Our comments

The situation that is described in your letter appears to relate to either a series of proposed or completed transactions involving specific taxpayers. As explained in Information Circular IC-70-6R5 dated May 17, 2002 ("IC-70-6R5") 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 ruling request submitted in the manner set out in IC-70-6R5. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which we hope are of assistance to you. However, written opinions are not advance tax rulings and, accordingly not binding on the Canada Revenue Agency.

The Agency's views in regards to the above were provided at the 1992 Canadian Tax Foundation Round Table and are re-affirmed in paragraph 27 of Interpretation Bulletin IT-533, dated October 31, 2003.

Question 3 Deductibility of Interest on Assumed Debt

The department has taken the position that interest paid on assumed debt is not deductible under paragraph 20(1)(c) of the Act because it does not represent interest paid on "borrowed money." However, in response to question 8 at the 1989 Corporate Management Tax Conference, the department indicated that interest paid by a limited partner on debt assumed by the limited partner from the partnership will generally be deductible as provided for in paragraph 20(1)(c). What is the department's position on the deductibility of interest on assumed indebtedness?

The Agency's response was as follows:

Subparagraph 20(1)(c)(i) of the Act permits a deduction for interest on "borrowed money," while subparagraph 20(1)(c)(ii) permits a deduction for interest on "an amount payable for property acquired." If a taxpayer assumes another person's indebtedness, it cannot be said that the taxpayer has "borrowed money." Consequently, subparagraph 20(1)(c)(i) is not applicable. If a taxpayer has assumed another person's indebtedness as part of the purchase price of an asset acquired by the taxpayer, the taxpayer will have "an amount payable for property acquired" and thus, interest paid on that assumed indebtedness will be deductible to the extent provided for in subparagraph 20(1)(c)(ii).

In this regard, it should be pointed out that question 8 at the 1989 Corporate Management Tax Conference dealt with the situation where a limited partner assumed the partnership's debt obligation as part of the consideration given for the acquisition of his partnership interest.

(our emphasis added)

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency.

Yours truly,

Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch