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May 19, 2024

Tax Tips

Financing Fees / Borrowings - Partnership
Subject: Financing Fees
Number: 04-06
Date: 3/12/2004
When interest is deductible within a partnership and financing fees wind up after.

Members of a partnership are often required to borrow to fund the ongoing operations of the partnership. It may be more advantageous to borrow at the partnership level than borrowing at the individual partner level. For example, by borrowing at the partnership level, the recourse of lenders may be restricted to the assets of the partnership as opposed to personal assets. As well, excess funds may be paid out to the partners as a distribution of capital.

Proposed section 20.2 of the Canadian Income Tax Act allows for interest to be deductible on monies borrowed by a partnership where the loan proceeds are distributed to partners. The premise is that borrowed funds are being used to replace capital of the partners previously used in the business.

The interest will be deductible to the partnership as long as the distributions made to the partners do not exceed the partnership's adjusted equity immediately before the time of the distribution. Adjusted equity is defined as basically being the excess carrying value of the partnership's business assets, over the total of all liabilities. In effect, interest on the borrowed monies will be fully deductible even if the borrowed funds are used to pay down individual partner capital accounts.

Financing fees will normally be deductible over a 60-month period. If a partnership were to be wound up, then the partners are able to continue deducting the finance fees on the same basis that the partnership would have been able to deduct the fees.

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