CRA finds that there is no source disappearance where an interest-free advance made to a wholly-owned corporation (and funded with borrowed money) is forgiven

The sole shareholder of a CCPC uses borrowed funds to make an interest-free advance to the CCPC, and the CCPC then makes a proposal under the BIA, which is accepted by the creditors and entails the shareholder advance being cancelled. CRA considered that “the actual use of borrowed money, following the debt cancellation, continues to be for the purpose of investing in the shares of the corporation,” so that if “there is a reasonable expectation of deriving dividends,” the interest payable by the shareholder would continue to be deductible under general s. 20(1)(c)(i) principles without the need to resort to the s. 20.1(1) rule for source extinctions.

Neal Armstrong. Summary and translation of 2015-0588951C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 3.