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.
7-903313
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Deductibility of Interest Expense
Mr. Szyc of the Audit Opinions Section of Taxation Programs Branch referred your opinion request dated November 8, 1990 to us for reply. We regret that other workload has prevented an earlier response.
Facts
Our understanding of the facts is as follows:
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Issue
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Mr. McLeod has asked three questions related to this issue; our opinion as set out below incorporates our responses to those questions.
Our opinion
The Minister of Finance s press release dated June 2, 1987 stated that the proposed legislation referred to in the notice of Ways and Means Motion (of the same date) on interest deductibility would be enacted to confirm Revenue Canada's administrative practice with respect to the deductibility of interest. Accordingly, the administrative treatment confirmed in the June 2, 1987 Notice of ways and Means Motion reflects our continuing approach, that "...borrowed money used for the purpose of earning income from a business or property... for the purposes of paragraph 20(1)(c) includes borrowed money used by ...a corporation to pay dividends not exceeding its accumulated profits determined immediately before the dividends were paid... to the extent that the accumulated profits were used ... for a qualifying purpose...
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At the 1987 Corporate Management Tax
Conference, Revenue Canada defined accumulated profits to mean (p. 10:14):...accounting profits computed on an unconsolidated basis with investments accounted for on a cost basis".... Appraisal surplus and profits resulting from non-arm's length transactions which transform appraisal surplus into profits on a non-taxable or a tax-deferred basis would not form part of accumulated profits.
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Although the Notice of ways and Means Motion states that the proposed legislation is" ...for the purpose of the rules relating to the deduction of interest ...." subparagraph 20(1)(e) (ii) only allows those financing expenses incurred" in the course of borrowing money used by the taxpayer for the purpose of earning income from a business on property..." Since the wording of this purpose test is identical to that for interest deductibility in paragraph 20(1)(c), it is our opinion that the accumulated profits test should also apply to the borrowing of money referred to in subparagraph 20(1)(e)(ii) in the determination of the deductibility of financing expenses under that subparagraph
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Please do not hesitate to call if you have questions on this memorandum.
J.C. ClarkChiefLeasing & Financing SectionFinancial Industries DivisionRulings Directorate
Attachment
c.c.: W. Szyc Audit Application Division
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