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.
October 24, 1988 B. Dwyer (613) 957-2744
Dear XXXX
Re: Interest Deductibility
This is in response to your letter dated September 15, 1988, in which you request a technical interpretation of the June 2, 1987 Notice of Ways and Means Motion regarding interest deductibility. More specifically, you wish to know whether the word "capital" in subclause (1)(b)(i) of the Notice refers to paid-up capital for income tax purposes or states capital for corporate purposes.
On September 29, 1988, the Minister of Finance announced an extension of the rules set out in the June 2, 1987 Notice. This extension was set out in a new Notice of Ways and Means Motion released September 29, 1988. The response contained in this letter is based on the wording of this later Notice.
We consider that the term "capital" as used in subclause (1)(b)(i) of the Notice generally can include contributed surplus. To that extent, we accept a calculation of "capital" based on generally-accepted accounting principles.
Nevertheless, we also take the position that "capital" does not include appraisal surplus. For example, assume that an asset with an appraisal surplus is transferred to a related corporation on a tax-deferred basis in return for preference shares with a low paid-up capital but a stated capital that includes the appraisal surplus. If the preference shares are then redeemed, the deemed dividend arising on redemption would not be a return of "capital" to the extent of the appraisal surplus. To this extent, the calculation of "capital" reflects paid-up capital considerations.
No legislation has yet been announced to implement the provisions of the Notice and the above comments are of a general nature only. In particular, the opinions expressed in this letter do not constitute an advance income tax ruling and, in accordance with paragraph 24 of Information Circular IC 70-6R, are not binding on the Department.
Yours truly,
for Director Financial Industries Division Rulings Directorate
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© Her Majesty the Queen in Right of Canada, 1988
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© Sa Majesté la Reine du Chef du Canada, 1988
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