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.
May 18, 1988
HEAD OFFICE Resource Industries Section Allen B. Nelson (613) 957-8284 SUBJECT: XXXX
We are writing in reply to your memo of March 2, 1988, concerning the deductibility of interest expenditures incurred by XXXX under a loan guarantee arrangement with XXXX
Facts
XXXXXXXXXXXX
D.O Position
XXXX loan guarantee was given for no consideration and therefore interest paid on XXXX Bank loan used to honour its guarantee was not laid out for the purpose of gaining or producing income and is not deductible pursuant to paragraph 20(1)(c) of the Act. However, IT Bulletin 445, paragraph 9, subject to paragraph 10, indicates that departmental policy would allow XXXX to claim the interest expense, since the appropriate conditions noted therein have been met.
You have asked for our opinion as to whether paragraph 10 of IT-445 applies in this case to deny XXXX interest deduction and whether subsection 245(2) of the Act would apply to the transactions.
Our Opinion
It does not appear that XXXX payment under the guarantee given in respect of XXXX debts, has result in a material benefit to any of the other shareholders of XXXX Therefore, subsection 245(2) of the Act and paragraph 10 of IT 445 are not applicable in this case.
In order for interest on XXXX Bank loan to be deductible, there has to be reasonable prospects of XXXX providing income to XXXX (refer to IT 445 paragraph 4, 84 DTC 1633 and 83 DTC 459).
Considering XXXX has ceased to carry on business and it still owns the LAND, it would, in our opinion, be reasonable to allow XXXX to claim a portion of its interest expense on its Bank loan for the 1984 and subsequent taxation years. The deductible portion of XXXX interest expenditures should be limited to the amount of interest that one could reasonably assume that XXXX would recoup if XXXX sold the LAND.
As this determination involves a question of valuation, you may want to consult with your real estate appraisal section.
We hope the above will be of assistance in finalizing your audit of XXXX
Section Chief Resource Industries Section Bilingual Services and Resource Industries Division Rulings Directorate
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