Principal Issues: Where a corporation’s retained earnings are increased by an amount that relates to an appraisal surplus, would a later decrease in the corporation’s retained earnings resulting from depreciation claimed in respect of that appraisal surplus be considered (i.e., reversed) when determining the accumulated profits of the corporation that were being used for purposes that would have qualified for interest deductibility had the capital been borrowed money. I.E., for the purpose of determining the amount that the corporation could borrow and deduct interest paid or payable thereon?
Position: Yes; when determining the accumulated profits of a corporation that were being used for purposes that would have qualified for interest deductibility had the capital been borrowed money (i.e., for the purpose of determining the amount that the corporation could borrow and deduct interest paid or payable thereon), we would consider (i.e., reverse) both increases and decreases to the corporation’s retained earnings resulting from an appraisal surplus included in the corporation’s retained earnings prior to that time.
Reasons: It is a corporation’s accumulated profits that were being used for purposes that would have qualified for interest deductibility had the capital been borrowed money immediately before shares are redeemed, capital is returned or dividends are paid that are relevant for the purpose of determining the amount that the corporation could borrow and deduct interest paid or payable thereon, and when determining a corporation’s accumulated profits at a point in time, it is the retained earnings of the corporation at that time that are relevant.