2000 Ruling 2000-0004183 - INTEREST EXPENSE CONSOLIDATION

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: Interest Deductibility

Position: OK

Reasons: Standard Ruling on interest consolidation/matching.

XXXXXXXXXX
XXXXXXXXXX 								2000-000418
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX - Advance Income Tax Ruling

This is in response to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer.

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed, and none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

In this letter "the Act" means the Income Tax Act, RSC 1985, Fifth Supplement, c.1, as amended from time to time.

Facts

1. XXXXXXXXXX ("ACO") is a public corporation and a taxable Canadian corporation as defined in subsection 89(1) of the Act. The business number of ACO is XXXXXXXXXX. XXXXXXXXXX of ACO are listed on the XXXXXXXXXX Stock Exchange. XXXXXXXXXX. There are approximately XXXXXXXXXX outstanding. ACO holds unsecured, interest bearing promissory notes of XXXXXXXXXX ("BCO") with a face value of approximately $XXXXXXXXXX. ACO holds unsecured, interest bearing promissory notes of XXXXXXXXXX ("CCO") with a face value of approximately $XXXXXXXXXX.

2. BCO is a wholly owned-subsidiary of ACO and is a taxable Canadian corporation. ACO acquired BCO in XXXXXXXXXX as described in Advance Income Tax XXXXXXXXXX. ACO and BCO were formerly known and referred to as "XXXXXXXXXX" and "XXXXXXXXXX", respectively in that ruling.

3. XXXXXXXXXX ("DCO") is a wholly-owned subsidiary of ACO and is a taxable Canadian corporation. A wholly-owned subsidiary of ACO, XXXXXXXXXX ("ECO"), acquired a predecessor of DCO (which was also known as XXXXXXXXXX ("Old DCO")) on XXXXXXXXXX. Funded by share capital subscribed for by ACO, ECO purchased all outstanding shares of Old DCO for aggregate consideration of approximately $XXXXXXXXXX. Subsequent to the acquisition, ECO and Old DCO were amalgamated as DCO.

4. CCO is a wholly-owned subsidiary of DCO, and is a taxable Canadian corporation. CCO was inactive prior to XXXXXXXXXX. Certain of these properties transferred were the subject of subsection 85(1) elections. Subsequent to the acquisition of the XXXXXXXXXX CCO acquired approximately $XXXXXXXXXX of Class XXXXXXXXXX preferred shares of ACO using funds loaned to CCO by ACO.

5. Pursuant to a partnership Agreement entered into by ACO, BCO and CCO dated XXXXXXXXXX ("Company") was formed in accordance with the laws of XXXXXXXXXX. BCO and CCO transferred all of their XXXXXXXXXX and related operations to Company in exchange for the assumption of liabilities and an interest in Company. Certain of the properties transferred to Company were the subject of subsection 97(2) elections.

6. Neither ACO or any of its direct or indirect subsidiaries or corporations related thereto are corporations described in paragraphs (a) to (f) of the definition of "specified financial institution" at subsection 248(1).

Proposed Transactions

7. DCO will borrow approximately $XXXXXXXXXX from a Canadian chartered bank on a daylight loan basis.

8. Using the proceeds from the daylight loan, DCO will subscribe for and acquire approximately XXXXXXXXXX Class XXXXXXXXXX preferred shares of CCO which will have the following terms:

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

b) redeemable by DCO at any time after issuance;

c) annual cumulative dividend at a rate of XXXXXXXXXX percent greater than the interest rate applicable to the DCO note described in paragraph 9 below;

d) non-voting; and

e) preference over common shares on any distribution of CCO's property on the winding-up of CCO to the extent of stated capital and unpaid cumulative dividends.

In addition, 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 in 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 included any obligation described in subparagraph 112(2.4)(b)(i) or a right described in subparagraph 112(2.4)(b)(ii).

9. CCO will immediately advance the proceeds from the issuance of the preferred shares to DCO in consideration for an unsecured promissory note bearing interest at XXXXXXXXXX%. The unpaid principal amount of the DCO Note will be due on demand.

10. Using the proceeds from the issuance of the DCO Note, DCO will repay the amount owing under the daylight loan.

11. DCO will pay interest in respect of the DCO Note each year.

12. Each year CCO will declare and pay dividends to DCO on the CCO preferred shares from its current or retained earnings.

13. DCO estimates that the foregoing arrangement will remain in place until the interest expense, incurred by DCO on the DCO Note equals approximately $XXXXXXXXXX.

Purpose of the Proposed Transactions

ACO, DCO and CCO want to match interest expense against taxable income in the related and affiliated group.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Provided that DCO has a legal obligation to pay interest on the DCO Note described in paragraph 9 above, in computing its income for a taxation year, DCO will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act, the lesser of the interest paid or payable in respect of that year on the DCO Note to the extent that the borrowed funds continue to be used for the purpose of gaining or producing income (other than income which would be exempt).

B. Dividends declared by CCO on the preferred shares and received by DCO, will be included in DCO's income for the taxation year of DCO in which the dividends are received pursuant to subsection 82(1) of the Act, and will be deductible in computing the taxable income of DCO for that taxation year pursuant to subsection 112(1) of the Act. The deduction under subsection 112(1) will not be denied by any of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act.

C. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, as to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on the Agency provided the proposed transactions are completed before XXXXXXXXXX. Also, these rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch