CRA expands Folio S3-F6-C1 to state that following a winding-up or amalgamation, assumed debt can be allocated for interest-deduction purposes to eligible assets

CRA has added the following two paragraphs to its Folio on interest deductibility:

1.63.1 ...Where a corporation acquires the shares of another corporation in exchange for an assumption of debt or a note payable to the vendor, the CRA would consider the shares that were initially acquired (and have disappeared) to have been substituted for assets formerly held by the acquired corporation that has been wound-up or amalgamated. These assets would then be tested for an eligible purpose.

1.63.2 In situations such as those in ¶1.63.1 but where the debt represents only partial consideration for the share acquisition, if some assets do not meet the purpose test, the taxpayer may adopt a flexible approach in linking the debt to the eligible assets formerly held by the acquired corporation... . Similarly, if some of those eligible assets are subsequently distributed as a dividend or a return of capital, taxpayers would be entitled to link the debt to any remaining eligible assets... .

This essentially repeats a position released 11 days ago in 2014-0555291I7 (dealing with Buyco acquiring Target partly with borrowed money, amalgamating with Target and then distributing Target assets without reducing the debt) except that it deals with purchase price indebtdness rather than borrowed money.

Neal Armstrong. Summary of S3-F6-C1 under s. 20(1)(c).