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 borrowed money used to reduce share capital
Position TAKEN:
A deficit for accounting purposes does not affect the amount that may be borrowed to return stated capital.
Reasons FOR POSITION TAKEN: Agency's position
XXXXXXXXXX 2000-005791
Yves Leclerc
Attention: XXXXXXXXXX
January 4, 2001
Dear Sir:
Re: Deductibility of interest on borrowed money used to reduce paid-up capital
This is in reply to your letter dated November 20, 2000 in which you requested a technical interpretation with respect to the deductibility of interest on borrowed money used to reduce stated capital of shares. In the situation to which you referred, the stated capital of the shares arose on a cash subscription for the shares.
The facts in your letter appear to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. Nevertheless, we offer the following general comments in connection with your request.
Where there has been an accounting write-down in assets and a corresponding shareholder's deficit for accounting purposes but there is no adjustment to the stated capital of the shares under corporate law, it remains our view that interest may be deductible under paragraph 20(1)(c) on money borrowed to reduce the stated capital of the shares.
We hope that these comments will be of assistance.
for Director
Financial Industries Division
Income Tax Rulings Directorate
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