| 24(1) | 5-901095 |
| B. Barsalo | |
| (613) 957-8284 | |
| 19(1) |
November 23, 1990
Dear Sirs:
Re.: Thin Capitalization Rules and Partnership
This is in reply to your letter of June 7, 1990 wherein you requested our opinion whether subsection 18(4) of the Income Tax Act (the "Act") applies to an Ontario corporate partnership that pays interest to certain specified non-residents.
Subsections 18(4) to 18(8) of the Act establish thin capitalization rules (the "Rules") for corporations, limiting the deduction for interest on debts owing to certain specified non-residents. You mentioned in your letter that subsection 18(4) of the Act appears to be drafted in such a way that it seems to apply only to corporations.
In a situation where a partnership is formed under the Ontario Partnerships Act and where all members or partners are corporations resident in Canada, you then enquired as whether we would apply the Rules to a corporate partnership and, if so, in what circumstances.
Our Comments
Generally speaking, a partnership is the relation that subsists between persons carrying on business in common with a view of profit. When a partnership pays interest to specified non-residents, both the partners and the partnership pay such interest since "partnership" refers to the partners collectively. However, it is our view that, for the purposes of the Rules, a partnership is deemed to be a "separate parson" by virtue of subsection 96(1) of the Act. Therefore, we will generally neither apply the Rules to the partnership nor to each corporate partners in the calculation of their respective income. However, if the creation of the partnership is an avoidance transaction, depending upon the circumstances, the general anti-avoidance rule might apply.
By comparison, our position stated in paragraph 18 of the interpretation bulletin IT-361R2 is based on the same principles that it is the partners per sent that have borrowed and have paid the interest on debt to the lender, not the partnership itself because the partnership is simply the form of relationship that exists between the partners and it is our view that subsection 96(1) of the Act does not apply for the purposes of subparagraph 212(1)(b)(vii) of the Act.
Our comments contained herein are provided pursuant to the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not rulings. If you have a particular fact situation similar to the circumstances outlined above, you may wish to apply for an advance income tax ruling which is binding upon our Department in accordance with the above stated Information Circular.
We apologize for the delay of our reply and hope our comments are of assistance to you.
Yours truly,
for Acting DirectorBilingual Services and Resource Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch