16 August 1996 External T.I. 9616655 - LIMITED RECOURSE AMOUNT

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX							961665

Attention: XXXXXXXXXX

August 16, 1996

Dear Sirs:

Re: Proposed Subsection 143.2(7) of the Income Tax Act (the "Act")

This is in reply to your letter dated May 7, 1996 concerning proposed subsection 143.2(7) of the Act with respect to a limited recourse debt as it applies to accounts payable.

You indicated that an indebtedness of an entity that meets the definition of a tax shelter investment may be a "limited recourse amount" ("LRA") and will include accounts payable for the purpose of proposed section 143.2 of the Act. You are unsure of the tax result where an account payable is paid within the terms of the commercial arrangement entered into between the parties. Where such arrangement would not include bona fide repayment terms nor a charge for interest in respect of the account payable, it is your view that the debt should be treated as a LRA at the end of the entity's taxation year. However, you feel that such result amounts to an annual penalty even though the year-end account payable is paid in the following year.

Every situation must be considered on the basis of the facts of the particular situation and without specific details of the situation, we are prepared to offer only the following general comments:

We agree that a trade payable will be a "limited recourse amount", as the term is defined under subsection 143.2(1) of the Act, and also will be deemed to be a limited recourse amount for the purposes of subsection 143.2(7) of the Act, unless the requirements described in paragraphs 143.2(7)(a) and (b) are met.

Also, it is our view that pursuant to proposed subsection 143.2(10) of the Act, an account payable of a taxpayer that was considered to be a limited recourse amount would only be an "expenditure" incurred by the taxpayer, for the purposes of section 143.2 of the Act, at the time and to the extent of the repayment thereof.

Under new proposed subsection 143.2(11) of the Act, relief is provided for short-term debts. An indebtedness of a taxpayer that otherwise would be a LRA under 143.2(7) and that is repaid within 60 days of the date on which the debt arose will be exempt under that latter subsection, provided that no part of such debt is repaid with a LRA or that the repayment cannot be considered to be a series of other debts and repayments that end more than 60 days after the debt arose.

These comments represent an opinion based on our interpretation of the proposed law described above as it will apply generally, if enacted as proposed. They may, however, not always be appropriate in the circumstances of a particular case. As indicated in paragraph 21 of Information Circular 70-6R2, this opinion is not a ruling and, accordingly, it is not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch