1 April 1997 External T.I. 9641755 - DEDUCTIBILITY 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.

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:

Deductibility of Interest

Position:

Question of fact, 4 different scenarios given and would need more information to comment directly on scenarios. Gave general comments on the purpose of the use of funds and use of capital account for partners.

Reasons:

Numerous scenarios presented and without sufficient details could only give general comments.

XXXXXXXXXX 964175

Attention: XXXXXXXXXX

April 1, 1997

Dear Sirs:

Re: Deductibility of Interest

This is in reply to your facsimile of December 17, 1996 in which you are requesting a technical interpretation relating to the deductibility of interest in 4 different situations.

The situations described in your letter appear to be an actual fact situations and written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3.

In order to properly determine the tax consequences relating to whether interest expense incurred by the partners would be deductible, we would need to examine all the documents and agreements relating to the transaction.

It is the Department's position with respect to the deductibility of interest, that it is the current use of the funds which must satisfy the eligible purpose test, since paragraph 20(1)(c) of the Income Tax Act (the "Act") establishes the requirement to trace the use of the funds. Accordingly, it is not the purpose of the borrowing but rather the purpose of the use of the funds which is looked at when determining whether the criteria of paragraph 20(1)(c) of the Act is met.

With respect to the purpose of the use of the borrowed funds in a partnership, we would also look at the current and direct use of the funds in the partners' capital accounts.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch