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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Deductibility of Interest on a Note issued to Redeem Shares
Position: Not Deductible
Reasons: Status Quo - The Note is not considered to be Borrowed Money.
July 3, 2002
Re: Paragraph 20(1)(c) of the Income Tax Act (the "Act") - Interest Deductibility
This is in response to your letter of February 14, 2002, concerning the deductibility of interest on a note issued to redeem shares.
In your letter, you have requested that an amendment be made to the Act to deem that a note issued by a corporation for the redemption, acquisition, or cancellation of its shares, or for the payment of a dividend be considered to be "borrowed money..." for the purposes of the interest deduction under the provisions of subparagraph 20(1)(c)(i) of the Act.
The situation identified in your letter involves an actual completed transaction that was reviewed by the applicable Tax Services Office and therefore we cannot make any specific comments. However, we can provide the following general comments.
Our view as stated in Income Tax Technical News Issue Number 3 dated January 30, 1995, is that that interest on a promissory note issued as consideration for the redemption or purchase for cancellation of a corporation's capital stock is not deductible under paragraph 20(1)(c) of the Act. In our view the note does not constitute "borrowed money" for the purposes of paragraph 20(1)(c)(i) and the administrative position set out in former IT-80 would not be available. In addition, it would not fit within subparagraph 20(1)(c)(ii) since no property had been acquired by the corporation to earn income from its business or from the shares so acquired. Any attempt to refinance such a note with money borrowed from a third party, would generally result in the application of subsection 20(3) of the Act so that the borrowed money would be deemed to have been used for the same purpose as the note was used, which was an ineligible use. These views are supported by the Parthenon Investments Limited (97 DTC 5343) case. It is also the Agency's view that a deduction would not be available under the proposed draft legislation in section 20.2 since that provision also requires the existence of "borrowed money".
As you know, the Agency is currently reviewing all of its interpretive positions regarding interest deductibility in light of the recent decisions in the John R. Singleton (2001 DTC 5533) and Ludco Enterprises (2001 DTC 5505) cases by the Supreme Court of Canada. We are including in our review an analysis of all other current interest deductibility cases including Penn Ventilator (March 4, 2002 decision), which found in favor of the interest deductibility in a situation similar to that described in your letter. This review will include consultations with the Department of Justice, and the Department of Finance, which is responsible for tax policy including amendments to the Act and your concerns which have been noted. However, until the review is complete, our current positions will remain in effect.
We trust that these comments will be of assistance.
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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