30 November 1996 Ruling 9714643 - INTEREST DEDUCTIBILITY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1.Lumpy dividend of $XXXXXXXXXX, is it subject to subsection 55(2)?

2.Deductibility of interest in targetco which is profitable.

Position:

1.No. No gain that would have occurred, but for the dividend.

2.Ok.

Reasons:

1.Shares of Targetco trading at $XXXXXXXXXX before acquistion. Sale at FMV after acquisition would result in no gain.

2.Purpose and use of borrowing is to acquire pref shares of Acquisitionco having a dividend rate > interest rate on borrowing. Targetco and acquisitionco could amalgamate and interest would be deductible to Amalco. However, Acquisitionco wished to remain separate in order to make other investments.

XXXXXXXXXX							971464
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested various advance income tax rulings on behalf of the above referenced taxpayers in respect of the proposed transactions described herein. We also acknowledge your letters dated XXXXXXXXXX and our meeting of XXXXXXXXXX, and our several telephone conversations.

Except as otherwise noted, all statutory references in this ruling application are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th Supplement) C.1, as amended (the "Act").

To the best of the knowledge of XXXXXXXXXX, none of the issues involving the rulings requested herein are being considered by a District Taxation Office, Tax Services Office or Taxation Centre in connection with a return already filed, nor are any of these issues under objection or appeal.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1.XXXXXXXXXX was formed under the Company Act (XXXXXXXXXX) on XXXXXXXXXX and is a Canadian-controlled private corporation as defined at subsection 125(7) and a taxable Canadian corporation (“TCC”). The only issued and outstanding shares of XXXXXXXXXX are common shares owned by XXXXXXXXXX. Prior to the Proposed Transactions, XXXXXXXXXX has no investments in any other corporations. The term TCC as used here and subsequently has the meaning assigned by that definition in subsection 89(1).

2.XXXXXXXXXX was formed under the Company Act (XXXXXXXXXX) on XXXXXXXXXX and is a public corporation and a TCC. The issued and outstanding shares of XXXXXXXXXX are XXXXXXXXXX voting common shares (the “XXXXXXXXXX Shares”). XXXXXXXXXX tax account number is XXXXXXXXXX and it files its tax returns at the XXXXXXXXXX TSO.

Immediately after the transaction described in paragraph 13 below neither XXXXXXXXXX nor any of its direct or indirect subsidiaries will be corporations described in paragraphs (a) to (f) of the definition of “specified financial institution” at subsection 248(1). The term "public corporation" as used here and subsequently has the meaning assigned by that definition in subsection 89(1).

3. XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX will use the proceeds from XXXXXXXXXX to acquire shares in and make advances to XXXXXXXXXX in order to fund the XXXXXXXXXX acquisition described in paragraph 13 below.

4. XXXXXXXXXX

5.Currently, XXXXXXXXXX% of the shares of XXXXXXXXXX are held by XXXXXXXXXX a corporation formed under the Business Corporations Act (XXXXXXXXXX), which is a wholly-owned subsidiary of XXXXXXXXXX, a corporation formed under the Company Act (XXXXXXXXXX) and affiliated with XXXXXXXXXX within the meaning assigned by proposed section 251.1.

XXXXXXXXXX

XXXXXXXXXX

6.In early XXXXXXXXXX the Board and XXXXXXXXXX received a joint unsolicited offer (the “XXXXXXXXXX Offer”) from XXXXXXXXXX, a public corporation, whereby XXXXXXXXXX offered to acquire all of the XXXXXXXXXX Shares in consideration for $XXXXXXXXXX/per share.

7.Pursuant to the XXXXXXXXXX Offer, XXXXXXXXXX has entered into agreements with XXXXXXXXXX under which XXXXXXXXXX is to acquire all of the XXXXXXXXXX issued shares of XXXXXXXXXX for $XXXXXXXXXX/share XXXXXXXXXX, resulting in a total purchase price of $XXXXXXXXXX. It is estimated that XXXXXXXXXX total cost of acquiring the XXXXXXXXXX Shares, including transaction costs, will be approximately $XXXXXXXXXX.

8.Pursuant to a separate agreement with XXXXXXXXXX, XXXXXXXXXX has agreed to sell its interest in the XXXXXXXXXX to XXXXXXXXXX for total consideration of $XXXXXXXXXX (the “XXXXXXXXXX Agreement”). Completion of the transactions contemplated under the XXXXXXXXXX Agreement is a condition precedent to XXXXXXXXXX acquisition of the XXXXXXXXXX Shares.

9.Prior to the Proposed Transactions XXXXXXXXXX will be unrelated.

Proposed Transactions

10.XXXXXXXXXX will issue XXXXXXXXXX Trust Units upon the exercise or deemed exercise of the XXXXXXXXXX. XXXXXXXXXX will also issue XXXXXXXXXX.

The net proceeds to be received by XXXXXXXXXX from the issue XXXXXXXXXX is approximately $XXXXXXXXXX.

11.XXXXXXXXXX will use such net proceeds to acquire $XXXXXXXXXX shares and XXXXXXXXXX Series XXXXXXXXXX Notes of XXXXXXXXXX in consideration for $XXXXXXXXXX.

The XXXXXXXXXX Notes are unsecured and bear interest at a rate between XXXXXXXXXX% per annum, payable quarterly. The principal amount of the Series XXXXXXXXXX Notes will be payable in full on XXXXXXXXXX.

XXXXXXXXXX

12.XXXXXXXXXX will receive advances under debt facilities from a Canadian chartered bank, XXXXXXXXXX and, from XXXXXXXXXX loan in the amount of approximately $XXXXXXXXXX.

XXXXXXXXXX

13.XXXXXXXXXX will acquire, at fair market value, all of the issued shares of XXXXXXXXXX and all the shares of XXXXXXXXXX not owned by XXXXXXXXXX in consideration for $XXXXXXXXXX.

Subsequent to the acquisition, XXXXXXXXXX will be “affiliated persons” within the meaning of proposed subparagraph 251.1(1)(b)(i). Also, XXXXXXXXXX will elect in prescribed form not to be a "pubic corporation".

14.Immediately following the acquisition by XXXXXXXXXX of the issued shares of XXXXXXXXXX will amalgamate pursuant to the provisions of the Company Act (XXXXXXXXXX) to form a new corporation (hereinafter referred to as "XXXXXXXXXX") in such a manner that:

(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of XXXXXXXXXX by virtue of the merger;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of XXXXXXXXXX by virtue of the merger; and

(c) all the shareholders (except any predecessor corporation) of the predecessor corporations before the merger will receive capital stock of XXXXXXXXXX.

15.XXXXXXXXXX will pay a dividend of $XXXXXXXXXX to XXXXXXXXXX. XXXXXXXXXX will use the proceeds from the dividend to repay the $XXXXXXXXXX daylight loan referred to in paragraph 12 above.

16.XXXXXXXXXX will borrow $XXXXXXXXXX from a Canadian chartered bank on a daylight loan basis (“Daylight Loan”).

17.Using the proceeds from the Daylight Loan, XXXXXXXXXX will subscribe for and acquire XXXXXXXXXX preferred shares of XXXXXXXXXX (the “XXXXXXXXXX Preferred Shares”). Such shares will have the following rights and restrictions:

a)stated capital and redemption amount of $XXXXXXXXXX/share;

b)any outstanding XXXXXXXXXX Preferred Shares will be redeemable on XXXXXXXXXX;

c)annual cumulative dividend at a rate XXXXXXXXXX greater than the interest rate applicable to the XXXXXXXXXX Note described in paragraph 18 below;

d)non-voting; and

e)preference on any distribution of XXXXXXXXXX property on winding-up of XXXXXXXXXX.

Further, these shares:

f)will not be shares in respect of which any person or partnership will be obligated to effect an undertaking described in subsection 112(2.2);

g)will not be part of a “dividend rental arrangement” as defined at subsection 248(1);

h)will not be shares in respect of which:

i)any person or partnership will be obligated to effect an undertaking described in paragraph 112(2.4)(a); or

ii)the consideration for which the shares will be issued will not be or include any obligation described in subparagraph 112(2.4)(b)(i) or a right described in subparagraph 112(2.4)(b)(ii).

18.Such proceeds from the issuance of the XXXXXXXXXX Preferred Shares will immediately be advanced to XXXXXXXXXX in consideration for a promissory note (the “XXXXXXXXXX Note”) bearing interest at a rate XXXXXXXXXX higher than the rate applicable to the Series XXXXXXXXXX Notes, payable quarterly. The unpaid principal amount of the XXXXXXXXXX Note will be due in full on XXXXXXXXXX provided that up to XXXXXXXXXX% of the XXXXXXXXXX Preferred Shares may be redeemed in each calendar year and XXXXXXXXXX will have the right to repay up to XXXXXXXXXX% of the original principal amount of the XXXXXXXXXX Note in each calendar year without prepayment penalty.

19.XXXXXXXXXX will use the proceeds from the issuance of the XXXXXXXXXX Note, to fully repay the amount owing under the Daylight Loan.

20.XXXXXXXXXX will pay interest in respect of the XXXXXXXXXX Note each year.

21.Using the proceeds from interest received in respect of the XXXXXXXXXX Note, XXXXXXXXXX will declare and pay dividends to XXXXXXXXXX on the XXXXXXXXXX Preferred Shares each year.

22.The above transactions will close on or before XXXXXXXXXX.

Purpose Of The Proposed Transactions

XXXXXXXXXX wishes to isolate the business operations, property and obligations of XXXXXXXXXX from XXXXXXXXXX. This will facilitate future acquisitions by XXXXXXXXXX on behalf of XXXXXXXXXX.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purposes of the proposed transactions, we confirm the following:

A.Provided that XXXXXXXXXX has a legal obligation to pay interest on the XXXXXXXXXX Note, as described in paragraph 18 above, XXXXXXXXXX may deduct the interest on the XXXXXXXXXX Note paid or payable in the year (depending upon the method regularly followed by it in computing its income) pursuant to paragraph 20(1)(c).

B.A dividend, described in paragraph 21 above, received by XXXXXXXXXX on the XXXXXXXXXX Preferred Shares,

(a) will be a taxable dividend that will, by virtue of subparagraph 82(1)(a)(ii), be included in computing the income of XXXXXXXXXX;

(b) will, by virtue of subsection 112(1), be deductible in computing the income of XXXXXXXXXX in the year in which it is received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(c) will be an "excepted dividend" for purposes of Part IV.1 by virtue of paragraph (b) of the definition "excepted dividend" in section 187.1;

(d) will be an "excluded dividend" for purposes of Part VI.1 by virtue of paragraph (a) of the definition "excluded dividend" in subsection 191(1); and

(e) by virtue of subsection 186(2) XXXXXXXXXX will be connected with XXXXXXXXXX. Consequently, provided that XXXXXXXXXX is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividends referred to in this Ruling B, XXXXXXXXXX will be not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

C.The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions to redetermine the tax consequences described herein.

These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada, Taxation provided that the proposed transactions described herein are completed by XXXXXXXXXX.

Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate