| 19(1) | File No. 5-8466 |
| Blair P. Dwyer | |
| (613) 957-2744 |
September 19, 1989
Dear Sirs:
Re: Deductibility of Interest on Money Borrowed by Partnership to return Capital to its Partners
This is in reply to your letter dated July 26, 1989 asking for our comments on the above-noted subject in light of the Notice of Ways and Means Motion on interest deductibility (released September 29, 1988).
As noted in your letter, a representative of the Department dealt with this issue in response to a question posed during the 1989 Corporate Management Tax Conference. The response indicated that interest would be deductible by the partnership to the extent the capital had been used by the partnership for a qualifying purpose.
For interest deductibility purposes, the "capital" of the partnership is generally the partner's equity account immediately before the distribution is made. As noted in your letter, the equity account may decrease over time, depending on the fortunes of the partnership business, and may in fact decline to an amount that is less than the original capitol contribution. To the extent that capital has "disappeared" in this manner, the capital of the partnership is correspondingly reduced for purposes of the interest deductibility rules.
Generally, the Department considers that capital should be determined in accordance with generally accepted accounting principles. However, capital does not include any appraisal surplus arising in the capital account (for example, as a result of a transfer of property to the partnership under subsection 97(2) of the Income Tax Act (Canada).
The comments expressed in this letter are of a general nature only and do not take into account considerations that might arise in the context of specific transactions or events. In accordance with Information Circular 70-6R, these comments do not constitute advance income tax rulings and consequently are not binding on the Department.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate