| DATE: March 8, 1990 | |
| TO: BELLEVILLE DISTRICT OFFICE | FROM: HEAD OFFICE |
| Chief of Audit | Financial Industries Division |
| Attention: Roy King | L. Workman |
| File No. 7-3700 |
Subject: 19(1) 24(1)
The purpose of this memorandum is to summarize our position with respect to 24(1) The relevant facts have been summarized in our previous memoranda dated August 15, 1988, October 14, 1988 and December 28, 1989 and therefore need not be repeated here. In addition to the facts set out in the above-noted memoranda careful consideration has been given to the information provided to us by 19(1) and 19(1) 24(1) at the February 27, 1990 meeting in our office which was attended by you.
Opinion
If we understood correctly 19(1) was the individual who advised 19(1) as to the financial implications 24(1) We were persuaded by his representation to the effect that the investment in the units only made "financial sense" if the purchaser viewed the investment in terms of a 10 year plus investment. It appears that an investor 19(1) could expect to do little more than break-even on an economic basis if he exercises his "put" at year 10. While it is not entirely free from doubt we tend to agree that an investor's expectation would be to continue as a partner beyond 10 years.
The deduction for interest pursuant to paragraph 20(1)(c) is not predicated on whether an investment makes economic sense but rather on the basis that it was made for the purpose of producing income from property or business. Therefore while this investment may have made economic sense (a key part of those economics being the deductibility for income tax purposes of the interest in question) it remains that based on the financial forecasts 24(1) Accordingly we have great difficulty in accepting that on the fats the very specific test set forth in paragraph 20(1)(c) has been met.
24(1)
Comment
As we indicated some time ago we do not have any particular knowledge of the real estate industry. It would seem appropriate to determine what an acceptable start-up period is for similar projects (ie shopping centres). Our general view is that developer would not likely enter into a project that would not generate income in excess of expenses for a 20 year period. If such a long payback period is normal in the industry we would want the opportunity to reconsider our opinion.
Conclusion:
24(1)
This is a question of fact that must be determined with regard to all of the information available. Therefore while we have provided you with our opinion the final determination and assessment of the relevant facts must necessarily be the decision of Audit.
We hope our comments are of assistance to you.
F. Lee WorkmanChiefFinancial Institutions SectionFinancial Industries DivisionRulings directorate
c.c. E. Gauthier