17 July 1995 External T.I. 9429715 - DISAPPEARING SOURCE RULES

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:

Loss of source - a partnership acb or original cost

Position TAKEN:
	Original cost but tracing may take withdrawals into 	account

Reasons FOR POSITION TAKEN:

Finance notes indicate that borrowed money is considered to be used for the purpose of earning income from a partnership interest and applies the same way as money borrowed used to acquire shares in a corporation.

		942971
XXXXXXXXXX	C. Tremblay

Attention: XXXXXXXXXX

July 17, 1995

Dear Sirs:

Re: Disappearing Source Rules

This is in reply to your letter of November 16, 1994, concerning the application of the "disappearing source rules" pursuant to section 20.1 of the Income Tax Act (the "Act") in respect of an investment in a partnership. You provided us with an illustration involving a limited partnership and asked it there was any difference if the taxpayer was actively involved in a partnership. We apologize for the delay.

Our Comments

The situations that are described appear to involve a series of actual or proposed transactions. It is not our practice to give written opinions concerning completed or proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

New subsection 20.1(5) of the Act applies where a taxpayer used borrowed money to acquire an interest in a partnership. It specifies that the borrowed money is to be considered to be used for the purpose of earning income from the partnership interest and subsection 20.1(1) of the Act will apply much the same way as it applies to borrowed money used to acquire shares in a corporation.

However, in our view, where money is borrowed to permit withdrawals by the partner, the interest on such loans would not be deductible since the borrowed money is not used to replace an amount that is being used by the partnership to earn income from a business. The result would normally be the same whether or not the taxpayer was actively involved in the partnership. In our view, the text of subsection 20(1)(c) of the Act requires tracing of the use of borrowed funds. Eligibility for the deduction is contingent on the use of the borrowed money for the purpose of earning income.

We caution that our replies are not advance income tax rulings but are merely opinions based solely on the information given. These opinions might very well change upon a review of all the facts and particularly after an examination of all pertinent documentation.

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