14 July 1997 External T.I. 9716025 - INTEREST DEDUCTION - NON-RESIDENT

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.

Principal Issues:

Is interest expense of a non-resident on borrowed funds from a non-resident parent deductible from the allocation of income of a partnership carrying on business solely in Canada ?

Position:

Generally no

Reasons:

partnership interest is from a different source than the partnership business

	                      	971602
XXXXXXXXXX	                       C. Tremblay

Attention: XXXXXXXXXX

July 14, 1997

Dear Sirs:

Re: Non-resident's income in Canada

This is in reply to your letter of June 12, 1997, wherein you requested our opinion on a hypothetical situation involving a non-resident corporation borrowing funds from its non-resident parent to invest in a partnership which will carry on business solely in Canada. The partnership will allocate a part of its income from carrying on the business in Canada to the non-resident corporation.

Generally, a non-resident person is only subject to Canadian Part I tax on income from sources within Canada determined under subsection 2(3) of the Act as if the non-resident person had no other income other than those indicated under subsection 115(1) of the Act. For a non-resident partner this is the partnership income from the business carried on in Canada. Subsection 9(1) of the Act refers to income from a business of a taxpayer as his profit for the year which, in general terms, is the accounting profit of the partnership business without taking into account a partner's carrying charges on his investment. Further, subsection 4(1) of the Act requires that a taxpayer's income from a business be computed on the assumption that he had no income or loss except from that source taking no deductions other than deductions that may reasonably be regarded as applicable thereto.

At page 495 of Lindley on the Law of Partnerships, Fifteen Edition, it is stated that although each member of an ordinary trading partnership can pledge credit for money borrowed in order to carry on its business, a partner cannot render the partnership liable to repay money borrowed by him to enable him to furnish the amount of capital which he agreed to bring in. Accordingly, in our view, the interest expense on the amount borrowed to invest in the partnership is not part of the business profits of the partnership.

The position in paragraph 15 of Interpretation Bulletin IT 138R2 confirms that carrying charges such as interest paid in respect of a partnership interest incurred are not deductible at the partnership level but rather at the partner's taxation year end and supports the view that interest expense from a loan for the purpose of obtaining an interest in a partnership is from a different source than the expenses from the business that flows to the partners from that partnership.

Accordingly, in our view, interest payable in respect of the year by a non-resident corporation pursuant to a legal obligation on borrowed money from another non-resident corporation used to acquire a partnership interest in Canada would not be deductible in Canada.

Yours truly,
Section Chief
Leasing and Financing Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch