8 December 1989 Ruling 59131 F - Deduction of Interest on Funds Borrowed to be Loaned at Less than Reasonable Rate of Interest

Dear Sirs:

We are writing in reply to your letter of November 23, 1989 concerning the policy in paragraph 7 of IT-445 where, as described in subparagraph 7(a) of the Bulletin, the proceeds of the loan are used by the shareholder's Canadian corporation to loan to its Canadian corporation to loan to its Canadian subsidiary, at less than a reasonable rate of interest (or at no interest).  Dividends received by the corporation from its subsidiary would be included in income under Part I of the Income Tax Act, even though a deduction under subsection 112(1) may be available in arriving at taxable income.  Our position is that the interest would be deductible by the shareholder, provided all other required conditions in that paragraph are also met.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate