8 March 1990 Ruling 59601 F - Non-Arm's Length Transfer/Interest Deduction

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.

March 8, 1990

19(1)

This is in reply to your letter of February 9, 1990.

You described a situation where 24(1)

Our Comments

Your query obviously relates to a proposed transaction involving specific taxpayers. As explained in Information Circular 70-6R, a copy of which is enclosed for your perusal, the Department is not prepared to provide written opinions on proposed transactions other than in reply to advance ruling requests submitted in the manner set out in that Circular. If the sale of the shares has already taken place, your query should be directed to the Toronto District taxation Office. We nevertheless offer the following general comments.

Where it is intended that property be transferred between non-arms length parties at fair market value (:FMV") and a note having a face amount equal to the FMV is given in exchange for the property, the transferor will, generally speaking, be considered to have received FMV for the property only where the note bears the market rate of interest applicable at the time of transfer. Otherwise, subsection 69(1) may apply and the application of this subsection could, depending upon the circumstances, have adverse tax implications as indicated in the enclosed Interpretation Bulletin IT-405.

There is nothing in the Income Tax Act (the "Act") dictating that interest should be charged on a note only where income has been earned by the borrower.

Generally speaking, interest is deductible under paragraph 20(1)(c) of the Act where it can be shown that the borrowed funds are being used to earn income from a business or property. Where the relevant property is dividend paying shares, it is possible for the interest on the related borrowing to be deductible in a particular taxation year notwithstanding that no dividends were paid on the shares in that year. By virtue of subsection 9(3) of the Act, "income from a property" does not include any capital gain from the disposition of that property.

The above comment are an expression of opinion only and are not binding on the Department, as explained in paragraph 24 of Information Circular 70-6R. We trust however that they are of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate