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.
CANADIAN TAX FOUNDATION ROUND TABLE (November 1992 Conference)
Question 12
Thin Capitalization
A Canadian corporation is related to a non-resident corporation that has made a loan to a non-Canadian partnership of which the Canadian corporation is a member. Do the thin capitalization rules in subsection 18(4) apply with respect to the debts of and interest payable by the non-Canadian partnership?
Department's Position
Where a taxpayer is a member of a partnership, the rules in subsection 96(1) apply in respect of the partnership for purposes of computing, inter alia, the taxpayer's income or taxable income earned in Canada. Under paragraph 96(1)(a) the relevant computation is made as if the partnership were a separate person resident in Canada. Under paragraph 96(1)(f) the taxpayer's income from the partnership for a taxation year is his share thereof.
In circumstances where a partnership (whose members include a corporation resident in Canada) has received a loan from a non-resident person, the rules in subsection 96(1) are relevant in determining how the thin capitalization rules would apply. Subsection 18(4) would be applied at the partnership level, ie. the partnership would be considered to have received the loan, not the partners. Subsection 18(4) would therefore not apply in these circumstances as the loan would not have been received by a corporation resident in Canada.
Where, however, it may reasonably be considered that the formation of the partnership was primarily to avoid the application of subsection 18(4) to interest paid on loans made to the partnership, the application of subsection 245(2) will be considered.
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