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.
Principal Issues: Would a corporate distribution subject to 84(4.1) of the Act be considered a return of capital or the payment of a dividend for interest deductibility purposes?
Position: A return of capital.
Reasons: The application of subsection 84(4.1) of the Act does not, in and of itself, alter the "hole" of capital withdrawn from the business.
National CTF Conference
November 27 29, 2011
Question 24
Please provide CRA's views as to the deductibility of interest on funds borrowed to finance a repayment of capital by a public company, in circumstances where the paid-up capital of the shares exceeds the return of capital, but subsection 84(4.1) applies to recharacterize the return of capital as a dividend. In these circumstances would the CRA consider that the funds have been borrowed to pay a dividend such that the corporation needs to have accumulated profits in order to sustain interest deductibility?
CRA's Response
As noted in the conclusion to paragraph 23 of IT-533 regarding interest deductibility in respect of borrowed money used to redeem shares, return capital or pay dividends, "The key concept in this context remains that of "filling the hole" of capital withdrawn from the business."
In our view, the application of subsection 84(4.1) of the Act to a public corporation's distribution does not, in and of itself, alter the "hole" of capital withdrawn from the business. Therefore, the interest expense on borrowed money used to fund such a return of capital would ordinarily be an exception to the direct use test to the extent that, as noted in IT-533, "the borrowed money replaces capital (contributed capital or accumulated profits) that was being used for purposes that would have qualified for interest deductibility had the capital been borrowed money (eligible purposes)".
2011-0426151C6
Lori Carruthers
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