12 July 1991 Administrative Letter 910926 F - Interest Deductibility

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.

Dear Sirs:

This is in reply to your letter dated April 1, 1991 wherein you requested a technical interpretation regarding the application of paragraph 20(1)(c) of the Income Tax Act (Canada) (the "Act") to the following situation.

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You have requested that we consider the impact of the Department of Finance Information Release 90-171 dated December 20, 1990 and titled "Tax Rules for Deductibility of Interest Extended" (the "Finance Release") and paragraph 7 of Interpretation Bulletin IT-445 in the preparation of our response.

In your letter you have outlined what appears to be an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of District Taxation Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide you with the following general comments which we hope will be of assistance to you.

It would be essential for the Department to review all of the facts in each particular situation in order to determine whether or not interest would be deductible under paragraph 20(1)(c) of the Act.  In the situation where funds are borrowed by a particular taxpayer to purchase property and that particular taxpayer retains the property but the interest bearing debt is assumed by a non-arm's length person in return for a non-interest bearing debt issued by the taxpayer then the interest incurred by the non-arm's length person would not be deductible under paragraph 20(1)(c) of the Act since the funds would not be used by the non arm's length person to produce income from a business or property.

In our view, neither paragraph 7 of IT-445 nor the Finance Release addresses the situation described herein. Paragraph 7 of IT-445 and paragraph 1(d) of the Notice of Ways and Means

Motion to Amend the Income Tax Act which was included with the Finance Release address the situation where Company A borrows money to be loaned at less than a reasonable rate to Company B which is not the case in the situation described.

The foregoing comments are given in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for DirectorReorganizations and Non-Resident Division Rulings DirectorateLegislative and IntergovernmentalAffairs Branch