10 January 1990 Ruling 59093 F - General Anti-avoidance Rules

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.

January 10, 1990

Dear Sirs:

Re: General Anti-Avoidance Rules

We are writing in response to your letter of November 20, 1989 in which you requested our opinion as to whether the provisions of subsection 245(2) of the Income Tax Act (the "Act") would apply to the following situation which was outlined in your letter.

Situation

1.     24(1)

2.     

3.     

4.     

5.     24(1)

6.     

7.     

8.     

9.     

10.     24(1)

Comments

The situation in your letter appears to involve actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of proposed transactions can only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R, dated December 18, 1978, and the related Special Releases thereto. However, we are prepared to offer the following general comments.

24(1)

You have requested an opinion as to whether subsection 245(2) of the Act would be applied to redetermine the interest that will be claimed by Amalco as described in paragraph 10 above. In order to determine whether or not subsection 245(2) of the Act would apply to a particular situation, we would have to examine all of the relevant facts and circumstances surrounding that particular situation. Inasmuch as we do not have all of the facts of the particular situation, we are not able to express a specific opinion as to whether subsection 245(2) of the Act would apply. However, it is our general view that that subsection might be applied to the situation outlined in your letter to redetermine the 24(1)  The situation outlined in your letter can be distinguished from the example described in paragraph 20 of Information Circular 88-2 dated October 21, 1988 in that paragraph 84.191)(b) and 212.1(1)(a) of the Act, as the case may be, will apply to the situation outlined in your letter such that Newco will be deemed to have paid a dividend to Taxpayer D and Taxpayer E.

Generally, interest on money borrowed to pay a dividend by a corporation is deductible only to the extent that the amount borrowed does not exceed the corporation's accumulated profits. Consequently, in the situation outlined in your letter, interest incurred by Amalco will be deductible only if it is in respect of that portion of the notes payable which does not exceed Holdco's accumulated profits.

We trust that the above comments will be of assistance.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch