4 July 1997 Ministerial Letter 9714508 - INTEREST DEDUCTIBILITY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Explanation of development and purpose of administrative and/or interpretive positions

Position: Self-explanatory

Reasons: N/A
ADM'S OFFICE (2) # 97-03761M
RETURN TO 15TH FLOOR, ALBION TOWER
Signed on July 4, 1997

XXXXXXXXXX

Dear XXXXXXXXXX:

I am writing in response to your letter of May 20, 1997, addressed to the Honourable Jane Stewart, former Minister of National Revenue concerning the administrative position adopted by the Department regarding the deductibility of interest expense incurred on funds borrowed to make corporate or partnership distributions of capital or earnings.

You have noted that your concern is that the case quoted by you, The Chase Manhattan Bank of Canada, proceeded to the court level without administrative relief being given. Although administrative positions do permit certain discretion in their application to situations exhibiting extenuating circumstances, this should not be construed as being their principal purpose. The purpose of developing an interpretive or administrative position is to ensure uniform application of a particular provision of the Income Tax Act to situations which the legislation does not directly address.

The interpretive positions adopted by the Department are the result of the careful and detailed analysis of jurisprudence relative to the types of situations under consideration. In the particular case noted previously, all of the jurisprudence to which the Court referred itself was similarly considered by the Department in the course of the development of the interpretive position. In that case, the decision of the Court coincided with the position adopted by the Department. While the result in this case may have been different had the legislation proposed by the Department of Finance been implemented, the Department has no recourse other than to apply the existing provisions of the Act notwithstanding any proposed amendments. Further, any interpretive position adopted by the Department must reflect those existing provisions.

In order to assist taxpayers and their professional advisors, the Department regularly announces new interpretive positions and changes to existing positions in publications such as Interpretation Bulletins and Income Tax Technical News and at public forums such as the Canadian Tax Foundation. With respect to the position regarding the deductibility of interest, the Department responded to several questions at the 1987 Corporate Management Tax Conference in which a number of issues in this area were addressed following the decision of the Supreme Court of Canada in the Phyllis Barbara Bronfman Trust case earlier that year and the Department's withdrawal of Interpretation Bulletin IT-80. Also, this issue was directly addressed by the Department in response to a question at the Revenue Canada Round Table segment of the 1996 Corporate Management Tax Conference of the Canadian Tax Foundation.

I trust that this fully explains the rationale employed by the Department in the development and application of interpretive positions. Thank you for taking the time to express your concerns in this matter.

		Denis Lefebvre
		Assistant Deputy Minister
		Policy & Legislation Branch
J.P. Dunn
957-2747
June 24, 1997
971450