e_dipn13a_Interest Expense_s16(2ABC)

There was no other security in this example the

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Unformatted text preview: a deposit of $4M, which generated tax-free interest of $160,000. There was no other security. In this example, the portion of deposit that was used to secure the two loans is $2.5M / $4M; and out of this portion, the part attributable to the onshore loan is $1M / $2.5M. The amount of interest expenses allowable for deduction will be reduced by $40,000, which is calculated as follows – $160,000 x Trusts 25. In considering the relation between the borrower and the holder of the deposit or loan used as security, if a deposit or loan is made by a trustee of a trust or a corporation controlled by such a trustee, the deposit or loan shall be deemed to have been made by each of the trustee, the corporation and the beneficiary under the trust [section 16(2D)]. Section 16(3) contains a definition of “beneficiary under the trust”. Restriction under section 16(2B) [The interest flow-back test] 26. Deduction of interest on loans that satisfy the conditions under section 16(2)(c), (d) or (e) will be restricted if there is an arrangement under which the interest payable will be paid, directly or through an interposed person, back to the borrower or to a person connected with the borrower who is not an “excepted person” within the meaning of section 16(2E)(c). The $2.5M $4M x $1M $2.5M = $40,000 $1M (onshore loan) $2.5M (onshore loan + offshore loan) = $32,000 13 provision applies where the said arrangement exists at any time during the basis period of the borrower for the year of assessment in respect of which deduction is claimed for the interest on the respective loan. Any payment of interest to a trustee or a corporation controlled by the trustee is deemed to be a payment to each of the trustee, the corporation and the beneficiary under the trust [section 16(2E)(b)]. 27. The term “arrangement” is defined in section 2. (a) It includes – any agreement, arrangement, understanding, promise or undertaking, whether expressed or implied, and whether or not enforceable or intended to be enforceable, by legal proceedi...
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