5-910890
Dear Sir\Madam:
Re: Subparagraph 20(l)(l)(ii) of the Income Tax Act
We are responding to your letter of March 25, l99l, in which you requested Revenue Canada's interpretation of paragraphs 20(1)(l)and (p) of the Income Tax Act (the "Act") with respect to non-conventional lenders, such as corporations engaged primarily in making or purchasing conditional sales contracts, equipment financing companies and factoring companies.
Paragraph 20(1)(1) of the Act permits reserves for doubtful debts of a taxpayer whose ordinary business includes the lending of money where the particular debt for which a reserve is being deducted was made or acquired in the ordinary course of the taxpayer's money-lending business. The jurisprudence related to paragraph 20(1)(l) indicates that the principal feature of a money-lending business is the lending of money at interest. Consequently, there must also be a debtor-creditor relationship in existence. Revenue Canada, Taxation accepts this position.
The types of corporations referred to above may, or may not, have, as an ordinary part of their business, the lending of money at interest and the creation of a debtor-creditor relationship. For example, an equipment financing company may "finance" the equipment through a lease arrangement. If the intentions of the parties to the lease arrangement are to create a lessee-lessor relationship and the funds received by the "financing company" are, in reality, rent, it is arguable that the equipment financing company is not in the money-lending business. Accordingly, the equipment financing company would be unable to take advantage of the provisions of paragraph 20(1)(l) because it is not in the business of lending money, nor is there a debt in existence.
In summary, the determination of whether or not a particular taxpayer is in the business of lending money is a question of fact. Revenue Canada, Taxation considers such factors as whether there has been a loan made or a debt created, whether there is a debtor-creditor relationship and whether the taxpayer intends to earn interest income.
While we trust the foregoing comments are of assistance, Revenue Canada, Taxation does not provide opinions in respect of specific fact situations except in response to an advance income tax ruling request and, therefore, the foregoing comments are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate