20 September 1990 Income Tax Severed Letter ACC9706 - Interest Deduction on Funds Borrowed to be Loaned at Less than Reasonable Rate of Interest

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.

Saint John, New Brunswick           Head Office
District Taxation Office            Financial Industries Division
                                    T. Murphy
Attention:  B. Dawe                 (613) 957-2747
            Chief of Audit

                                    7-900904

Subject: 24(1)

We recently received a request for an advance income tax ruling from 24(1). While we were unable to provide the requested ruling we did issue an opinion letter in which we discussed, in general, the various provisions of the Income Tax Act (the "Act") that could be applicable to both 24(1) and 19(1) with respect to the proposed transactions described in the ruling request. A copy of the ruling request and our reply are enclosed for your reference.

19(1) has requested that an officer from the district office contact his to arrange for a review of the tax consequences of the completed transactions.

In conjunction with our review of the ruling request we noticed several potential issues which you may wish to pursue. These issues are: 24(1)

Analysis

In response to question 46 at the Round Table we stated: It is the Department's view that all loans which a lender is committed to forgive if certain conditions are met fall within the ambit of subparagraph 12(1)(x)(iii) or (iv) of the Act. Only loans which are unconditionally repayable would be excluded. 24(1)

IT-239R2 discusses the deductibility of capital losses from guaranteeing loans for inadequate consideration and from loaning funds at less than a reasonable rate of interest in non-arm's length circumstances. As you will note, the general position of the Department is that pursuant to subparagraph 40(2)(g)(ii), a taxpayer's loss from the disposition of a debt is nil unless the debt had been acquired by the taxpayer for the purpose of gaining or producing income from a business or property. Paragraph 6 (also paragraph 10) of the bulletin sets out conditions which must be satisfied for a taxpayer to obtain an exception to the general position. Three of the four conditions in that paragraph are identical to those found in paragraph 7 of IT-445 . 24(1)

We hope our comments will be of assistance should you decide to pursue the potential issues we have identified. If you have any questions, please contact T. Murphy.

J.C. Clark

Chief Leasing & Financing Division Rulings Directorate

Enclosures