DATE October 30, 1985
To TORONTO DISTRICT OFFICE
FROM CORPORATE RULINGS DIVISION R.B. Day (613) 957-2136
ATTENTION W.J. Robertson Audit Review 148-1-4
RE: XXXX (the "taxpayer") Interest on Instalment Notes Active Business Income or Canadian Investment Income
We are writing in reply to your memorandum of September 20, 1985 wherein you requested our views as to whether or not interest on instalment notes could be included in adjusted business income ("ADJUBI") for purposes of the Manufacturing and Processing ("M & P") profits deduction.
Our understanding of the facts in this case is as follows:
Facts
XXXX
Taxpayer's Position
The taxpayer contends that the interest of XXXX is active business income and has included same in ADJUBI for purposes of computing their M & P deduction.
Although the notes could be viewed as long term investments, it is their view that there is a direct relationship between the notes and the business being carried on by the taxpayer as the notes were derived from the business operations i.e. There is "an interconnection, an interlacing, an interdependence, a unity" embracing notes receivable and the business, as discussed in Marsh and McLennan 83 DTC 5180.
District Office Position
It is your view that the interest of XXXX is investment income and should be deducted from ADJUBI in the computation of the Manufacturing and Processing Profits deduction because:
1. The interest is earned on long term XXXX investments.
2. The 1984 Balance Sheet indicates the funds are not needed in the operations of the business and are clearly in excess of operational needs.
Rulings Opinion
We have reviewed the opposing arguments set out in your memorandum and other documentation.
It is our view that, on balance, the interest received by the taxpayer should be considered active business income rather than Canadian investment income. The reasons for our views are as follows:
1. XXXX
2. Paragraph 9, of IT 73R3 suggests that interest income from long term investments may be categorized as active business income if there is a clear relationship to a business carried on by the taxpayer.
In this case, the taxpayer has one business and one customer XXXX and the interest income is directly related to the sale of its entire production to XXXX.
3. In the Federal Court of Appeal decisions in the Queen v. Ensite Limited, it was held that interest income earned on "swap deposits" used for long term financing of its Philippines plant was active business income not foreign investment income.
The position taken by the taxpayer in this case is, in our view, consistent with the Ensite decision.
Chief Merchandising, Manufacturing and Construction Corporate Rulings Division Corporate Rulings Directorate Legislative and Intergovernmental Affairs Branch