Dear Sirs:
Re: Paragraph 18(2)(f) of the Income Tax Act
This is in reply to your letter of December 27, 1990 concerning paragraph 18(2)(f) of the Income Tax Act (the "Act").
We apologize for the delay in replying to your request.
Two or more principal business corporations (corporations whose activities are described in paragraph 18(2)(f) of the Act) enter into a partnership whose sole activity is to hold land for future development. We assume that the partnership has loans or mortgages owing with respect to the lands held.
As you mention the introduction to paragraph 18(2)(f) of the Act seems to limit its application to corporations. Pursuant to preliminary discussion you had with an official of the Department you have decided to request a written opinion concerning the allocation of the base level deduction.
You suggest that if the partnership form of organization is selected it would seem equitable that each partner be allocated his portion of the base level deduction. In this manner the partners would be entitled to a proportionate share of the partnership interest expense "allocable" to a partner's interest. The failure to allow the allocation places the partnership at a disadvantage compared to a joint venture or individual ownership arrangement.
We are not aware of any provisions in the law that would provide for the allocations that your refer to. The wording of subsection 18(2.2) of the Act makes it clear that only a corporation can have a base level deduction.
While, under the above circumstances, a principal business corporation would be entitled to claim the base level deduction, since the interest expense is the partnership's and not the corporation's there is no basis for the corporation to claim such a deduction. There are no provisions in the Act to allocate interest, as such, from the partnership to the corporation. For example, note that if the Act allocated interest from a partnership to a principal business corporation the provisions of paragraph 18(3.4)(b) of the Act would not be necessary.
We trust these comments will be of assistance.
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch