912652
Dear Sirs:
Re: Part 1.3 of the Income Tax Act
This is in reply to your letters dated April 22 and September 10, 1991. We apologize for the delay but it appears the original April 22 letter was not received.
Your enquiry concerns the investment allowance provisions in Part 1.3 of the Income Tax Act (the "Act"), particularly paragraph 181.2(4)(b) thereof. Your specific concern is the meaning of "a loan ... to another corporation ..." and whether this would include a loan made by a corporation to a partnership consisting of other corporations. It is your view that such a loan would be a loan to another corporation based on the decision in Norco Development Limited v. The Queen 85 DTC 5213.
Part 1.3 of the Act imposes a tax in respect of a corporation's taxable capital employed in Canada for the year. Two of the major components of Part 1.3 are the "capital" of a corporation and the "investment allowance" of a corporation. The rules for determining these two components are set out in subsections 181.2(3) and (4) of the Act. These make specific provision, in paragraphs (g) and (e) respectively, for determining the capital and investment allowance of a corporation where it is a member of a partnership.
It is noted that in applying paragraph 181.2(3)(g) to determine the capital of a corporate partner, relevant amounts, for example, include under paragraph 181.2(3):
(c) "... loans and advances to the partnership...";
(d) "... indebtedness of the partnership..."; and
(f) "... all other indebtedness of the partnership..."
Pursuant to paragraph 181.2(4)(e) of the Act, the investment allowance of a corporate partner will include the carrying value of its interest in the partnership. Such carrying value is, under subsection 181.2(5) of the Act, computed with reference to certain "asset(s) of the partnership", including, for example, shares of, and loans to, corporations.
It is our opinion that the scheme of the Act insofar as Part 1.3 and partnerships are concerned is to look to the relevant assets and liabilities on a partnership basis and, as set out in paragraph 181.2(3)(g) and subsection 181.2(5) of the Act, to allocate these based on the member's share of the partnership income or loss. In our view, therefore, a loan to a partnership consisting of corporate members would not be "a loan ... to another corporation" for purposes of Part 1.3 of the Act.
With respect to the Norco Development case, we note that it was concerned with subsection 129(6), a provision in Division F of the Act, "Special Rules Applicable in Certain Circumstances", and in particular, the computation of tax. As the rules in section 96(1) of the Act apply for purposes of computing a partner's income, certain losses, etc., but not for computing tax, it seems to us that it was open for the court to conclude that the "partnership as a separate person" concept in subsection 96(1) was not applicable in Norco Development. The court was then able to conclude that the loan was made to a corporation, based on the "statutory milieu of section 125 and subsection 129(6)" and its "object and spirit" relative to the facts in Norco Development. However, as noted above, our view is that Part 1.3 specifically contemplates partnership arrangements and it does so in a manner that does not regard a loan to a partnership as being a loan to the particular members.
Our comments are of a general nature and may not necessarily apply in the circumstances of a specific situation; nevertheless we hope this will be of assistance.
Yours truly
for DirectorFinancial Industries DivisionRulings Directorate