2000 Ruling 2000-0043903 - BORROWING TO PAY A DIVIDEND

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: Deductibility of interest on funds borrowed to pay dividends.

Position: Okay.

Reasons: Satisfies the retained earnings test.

XXXXXXXXXX 2000-004390

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Madam:

Re: Advance Income Tax Ruling
XXXXXXXXXX

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

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") was formed under the laws of XXXXXXXXXX, and is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act. ACO is a holding company whose principal asset is shares of XXXXXXXXXX ("BCO"). ACO's taxation year ends on XXXXXXXXXX.

2. All of the issued and outstanding shares of ACO are owned by XXXXXXXXXX. ("CCO"), a XXXXXXXXXX corporation.

3. CCO is owned by XXXXXXXXXX ("DCO"), a XXXXXXXXXX corporation. DCO is owned by XXXXXXXXXX ("ECO"), a XXXXXXXXXX corporation and ultimate parent of ACO.

4. As of XXXXXXXXXX, ACO had share capital of $XXXXXXXXXX, contributed surplus of $XXXXXXXXXX, and retained earnings of $XXXXXXXXXX.

5. ACO reported a gain of $XXXXXXXXXX in XXXXXXXXXX from the disposition of its XXXXXXXXXX % interest in XXXXXXXXXX ("FCO") by way of a share redemption. The remaining shareholder of FCO, XXXXXXXXXX ("GCO"), a non-resident corporation, did not deal at arm's length with ACO. The disposition of FCO was part of ECO's disposition of its XXXXXXXXXX business to an arm's length purchaser, XXXXXXXXXX ("HCO") pursuant to an agreement entered into on XXXXXXXXXX. The remaining shares of FCO were then disposed of by GCO to HCO on XXXXXXXXXX. The shares of XXXXXXXXXX, the parent of GCO, were sold to HCO on XXXXXXXXXX, along with all of the remaining assets and shares associated with the XXXXXXXXXX business.

6. ACO received a dividend of $XXXXXXXXXX from BCO in XXXXXXXXXX. As a result, ACO expects to increase its retained earnings by $XXXXXXXXXX representing the net amount of its expected earnings for the XXXXXXXXXX taxation year.

7. Prior to implementing the proposed transactions referred to in paragraphs 9 and 10 below, ACO will borrow $XXXXXXXXXX and use the borrowed funds to pay a dividend of $XXXXXXXXXX to CCO. This transaction is the subject of a previous ruling issued on XXXXXXXXXX, 1999 (File #992492), as amended on XXXXXXXXXX, 1999 (File #993159) and XXXXXXXXXX, 2000 (File #2000-002557).

8. There are no amounts included in ACO's retained earnings that relate to an appraisal surplus or that arose as a consequence of any transaction undertaken to transform an appraisal surplus into retained earnings. There are no amounts included in ACO's retained earnings that resulted from profits or gains from transactions between ACO and non-arm's length parties with the exception of the transactions described in paragraph 5 and 6 above.

Proposed Transactions

9. ACO will borrow sufficient funds in order to pay a dividend not exceeding its retained earnings at that time of up to a maximum of $XXXXXXXXXX to CCO.

10. ACO will use the borrowed funds referred to in paragraph 9 above to pay a dividend of the same amount to CCO.

Purpose of the Proposed Transactions

11. ACO's ultimate parent, ECO, wishes to repatriate ACO's retained earnings.

Ruling

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 ruling is as follows:

A. Provided that ACO has a legal obligation to pay interest on the loan referred to in paragraph 9 above, in computing its income for a taxation year, ACO 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 loan or a reasonable amount in respect thereof.

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 that the proposed transactions described in paragraphs 9 and 10 above, are completed by XXXXXXXXXX.

Yours truly,

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