In 2013-0512551I7, the CRA confirmed that Canadian GAAP governs a corporation’s retained earnings for thin capitalization purposes, not the income allocation rules for partnerships in s. 96. In broad terms, a Canadian corporation (Canco) cannot deduct interest expense on loans from non-resident group members if such loans exceed 1.5 times to the total of Canco’s contributed surplus, paid-up capital, and retained earnings. In the facts considered, Canco had borrowed money from non-resident group members, and Canco was a partner in a captive Canadian partnership. In the CRA’s view, once the basis of accounting (i.e., consolidation method, equity method, or cost method) is established by Canadian GAAP as being appropriate for Canco’s investment in the partnership, this should govern the determination of Canco’s retained earnings derived from the partnership for purposes of the thin capitalization rules. This view is merely an extension of the CRA’s long-standing position that Canco’s contributed surplus and retained earnings for thin capitalization purposes must be determined in accordance with Canadian GAAP, but may not include unrealized appraisal surplus (2012-0445891E5 and 2010-0384001E5).