In print: Foreign affiliates: Tracing the purpose and use of funds

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Tracing the purpose and use of funds is fundamental in determining the ability of a taxpayer to deduct interest on a debt.

Various judicial decisions regarding interest deductibility have commented on the practice of tracing, prompting the Canada Revenue Agency to publish its administrative practices. Numerous foreign affiliate rules that relieve a taxpayer from imputed income contain purpose-and-use tests as conditions for their application.

This article describes the tracing requirements for certain foreign affiliate provisions, and demonstrates how interest-tracing concepts can be applied to support the purpose and use of funds by a foreign affiliate.