2003 Ruling 2003-0032993 - AMALGAMATION INTEREST EXPENSE

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:

Whether interest remains deductible after an amalgamation

Position: Yes

Reasons: Interest deductibility rules

XXXXXXXXXX 							2003-003299

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, and further to your electronic messages of XXXXXXXXXX requesting an advance income tax ruling on behalf of Amalco (and its predecessor corporations, D Co and RCo) in connection with the income tax treatment of the deductibility of interest on money borrowed to acquire the shares of RCo after the proposed amalgamation of D Co and RCo.

To the best of your knowledge and that of the taxpayers involved in this ruling request, none of the issues contained herein is:

(a) dealt with in an earlier income tax return of D Co, RCo, or a related person,

(b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of D Co, RCo, or a related person,

(c) under objection by D Co, RCo, or a related person,

(d) before the Courts or, if a judgement has been issued, the time limit for appeal to a higher Court has expired, or

(e) the subject of an advance income tax ruling request previously issued by the Income Tax Rulings Directorate.

DEFINITIONS

In this letter, unless otherwise expressly stated:

XXXXXXXXXX;

"Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended as at the date hereof, and unless otherwise stated every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

"adjusted cost base" has the meaning assigned by section 54;

"Amalco" means the corporation formed on the amalgamation of D Co and RCo;

"A Co" means XXXXXXXXXX, a corporation incorporated under the laws of the State of XXXXXXXXXX of the United States;

"B Co" means XXXXXXXXXX, a taxable Canadian corporation and an indirect wholly-owned subsidiary of XXXXXXXXXX that owns XXXXXXXXXX% of XXXXXXXXXX, which is the general partner of XXXXXXXXXX, a partnership that carries on an active XXXXXXXXXX business;

"C Co" means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX;

"XXXXXXXXXX Group" means XXXXXXXXXX and its subsidiaries;

"D Co" means XXXXXXXXXX corporation formed on the amalgamation of XXXXXXXXXX;

"XXXXXXXXXX Partnership" means XXXXXXXXXX, a general partnership formed between D Co and RCo under the Partnership Act (XXXXXXXXXX), which carries on an active XXXXXXXXXX business in Canada;

XXXXXXXXXX;

"paid-up capital" has the meaning assigned by subsection 89(1);

"public corporation" has the meaning assigned by subsection 89(1);

"RCo" means XXXXXXXXXX corporation formed XXXXXXXXXX upon the amalgamation of ECo and XXXXXXXXXX;

"taxable Canadian corporation" has the meaning assigned by subsection 89(1);

"the Treaty" means the Canada-United States Income Tax Convention; and

All amounts are in Canadian dollars unless otherwise stated.

The corporate head office of D Co and RCo is XXXXXXXXXX. The corporate head office of Amalco will be the same address. The Canada Customs and Revenue Agency ("CCRA") account numbers for D Co and RCo are XXXXXXXXXX, respectively. D Co and RCo have filed federal corporate income tax returns with the XXXXXXXXXX Tax Services Office of the CCRA and are serviced by the XXXXXXXXXX Taxation Services Office.

FACTS

1. A Co is a U.S. public company, headquartered in XXXXXXXXXX. A Co is a resident of the United States for purposes of the Act and the Treaty. XXXXXXXXXX.

2. C Co is a taxable Canadian corporation. C Co is a holding and group finance company, the assets of which consist of several subsidiaries including all of the issued and outstanding shares of B Co and D Co, all of the outstanding preferred shares of RCo and intercompany debt receivables, including amounts due from D Co, RCo and the XXXXXXXXXX Partnership. It is an indirect wholly-owned subsidiary of A Co.

3. D Co is a taxable Canadian corporation and a partner in the XXXXXXXXXX Partnership. Approximately XXXXXXXXXX% of the income of the XXXXXXXXXX Partnership is allocated to D Co under the partnership agreement.

4. RCo is a taxable Canadian corporation and a partner in the XXXXXXXXXX Partnership. Approximately XXXXXXXXXX% of the income of the XXXXXXXXXX Partnership is allocated to RCo under the partnership agreement. All of the issued and outstanding common shares of RCo are owned by D Co. The common shares have an adjusted cost base of $XXXXXXXXXX and paid-up capital of $XXXXXXXXXX. The XXXXXXXXXX preferred shares have an adjusted cost base of $XXXXXXXXXX and paid-up capital of $XXXXXXXXXX.

5. On XXXXXXXXXX D Co purchased all of the common shares of ECo (ECo is a corporation that was amalgamated along with its subsidiary XXXXXXXXXX and then amalgamated with RCo on XXXXXXXXXX) from XXXXXXXXXX (XXXXXXXXXX is a corporation that was amalgamated with its subsidiary XXXXXXXXXX and was then wound up into C Co on XXXXXXXXXX). The purchase price of the common shares was $XXXXXXXXXX, which resulted in a $XXXXXXXXXX demand promissory note bearing interest at XXXXXXXXXX% issued by D Co to XXXXXXXXXX. (the "Demand Note"), and XXXXXXXXXX common shares of D Co.

6. On XXXXXXXXXX C Co lent $XXXXXXXXXX ("the Promissory Note") to D Co, which used the borrowed money to repay the Demand Note owing to XXXXXXXXXX. The Promissory Note bears interest at XXXXXXXXXX % per annum for the first XXXXXXXXXX years. Interest is calculated daily and payable semi-annually.

7. XXXXXXXXXX used the $XXXXXXXXXX proceeds derived from the sale of the shares of ECo to redeem $XXXXXXXXXX of its preferred shares which were held by C Co. The redemption amount, adjusted cost base and paid-up capital of the redeemed preferred shares was $XXXXXXXXXX.

8. C Co used the $XXXXXXXXXX proceeds to redeem $XXXXXXXXXX of its preferred shares which were held by A Co's US subsidiary. The redemption amount, adjusted cost base and paid-up capital of the redeemed preferred shares was $XXXXXXXXXX.

9. On XXXXXXXXXX, B Co purchased an interest in the XXXXXXXXXX Partnership for $XXXXXXXXXX from RCo.

PROPOSED TRANSACTION

10. D Co and RCo will be amalgamated under the laws of the Province of XXXXXXXXXX to form Amalco. By virtue of the amalgamation, all of the assets of RCo and D Co will become assets of Amalco and Amalco will assume all of the liabilities of RCo and D Co, including the Promissory Note payable to C Co.

PURPOSE OF THE PROPOSED TRANSACTION

11. D Co and RCo will be amalgamated to match the interest expense with the business income allocated from the XXXXXXXXXX Partnership. At present, D Co incurs all the interest expense on the $XXXXXXXXXX Promissory Note but only earns XXXXXXXXXX % of the XXXXXXXXXX Partnership revenue.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transaction and purpose of the proposed transaction, and provided that the transaction is completed as proposed, we rule as follows:

Provided that Amalco has a legal obligation to pay interest on the debt assumed in the transaction described in paragraph 10 above, and provided the property acquired as a result of the amalgamation of D Co and RCo continues to be used by Amalco for the purpose of gaining or producing income therefrom, (other than property the income from which would be exempt), Amalco will, to the extent that such amount does not exceed a reasonable amount, be entitled to deduct, in computing its income for a taxation year, an amount paid in the year or payable in respect of that taxation year pursuant to paragraph 20(1)(c) of the Act as interest on the debt in respect of that taxation year.

This ruling is given subject to the general limitations and qualifications set forth in Information circular 70-6R5 dated May 17, 2002 issued by the CCRA, and is binding provided the proposed transactions are completed by XXXXXXXXXX.

This ruling is based on the Act as it currently reads and does not take into account any future amendments to the Act, whether currently proposed or not.

Nothing in this letter should be construed as implying that the CCRA has confirmed, reviewed, or made any determination in respect of the fair market value of any particular property or interests transferred as part of, or as contemplated by the Proposed Transaction or any aspect of the amalgamation pursuant to subsection 87(1) of the Act.

Additionally, nothing in this letter should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts, proposed transaction, other information or any other transactions or events, whether described in this letter or not other than those specifically described in the ruling given above.

Yours truly,

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