CASE STUDY #7
Recommended Solution:
(1) Review of the Act:
There are no specific provisions within the Act which
would disallow the interest expense or restrict the
capital cost allowance claimed by the partnership.
Interest on funds utilized to invest in a partnership
would be deductible by the partner. (2) Identification of a Tax Benefit:
If the partnership were to borrow the funds directly to
purchase the rental property then the amount of capital
cost allowance that could be claimed by the partnership
would be restricted pursuant to subsection 1100(11) of
the Regulations. This ability to claim both interest and
capital cost allowance on a rental property which would
result in a loss in the hands of the partner would
constitute a tax benefit for the purposes of subsection
245(1). (3) Identification of an Avoidance Transaction:
In this particular case, it would appear that the
partners would have an excellent argument that the
primary purpose of borrowing the funds personally then
investing the funds in the partnership would be to allow
the partnership to buy the rental property. It would be
very difficult to prove that an avoidance transaction
exists in this particular case. Remember a taxpayer can
arrange his affairs to attract the least amount of tax
which is accomplished in this particular case. Without
an avoidance transaction, the provisions of subsection
245(2) would not apply to the transactions. Other Comments:
You may wish to review the 1989 Round Table question 42
where the Department has expressed its position
concerning this particular case. The question also
addresses other similar cases where GAAR would probably
apply.000164