8 November 1990 Ruling 900743 F - Capitalization of Debt

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.

November 8, 1990

Dear Sirs:

Re:  Capitalization of Debt - Interplay of Sections 69 and 80 of the Income Tax Act (Canada) (the "Act")

This is in response to your letter dated May 8, 1990 in respect of the above matter. All statutory references in this letter are to the Act.

We wish to confirm that the position of the Department of National Revenue, Taxation (the "Department") in respect of the issue which you raised in your letter is that which is enunciated in paragraph 11 of Interpretation Bulletin IT-293R as amended by Special Release dated September 19, 1983. This position supersedes the previous position set forth in the answers to question 27 at the 1979 Round Table (1979 CR 627) and question 3 at the 1981 Round Table (1981 CR 728).

The rationale for this change in position is that, prior to September 19, 1983, the Department encountered situations where:

(a)     an intercorporate debt would be capitalized by the debtor issuing to the creditor shares having a fair market value less than the outstanding principal amount of the debt;

(b)     the creditor would "accept" that the cost to it of the shares issued by the debtor was equal to the fair market value of such shares by virtue of paragraph 69(1)(a), with the result that, under the former administrative position, subsection 80(1) would not be applied; and

(c)     the creditor would transfer the shares of the debtor to a related transferee in such a manner as to invoke paragraph 53(1)(f.1) or 85(4)(b).

Since the foregoing series of transactions enabled the creditor to neutralize the impact of paragraph 69(1)(a), while the debtor avoided the impact of subsection 80(1), the Department determined that the administrative position set forth in the above Round Table answers should be discontinued.

Accordingly, where the circumstances warrant, the Department will apply both paragraph 69(1)(a) and subsection 80(1) to the capitalization of a debt, although some relief may be available by reason of paragraph 53(1)(c), as discussed in the answers to question 68 at the 1987 Round Table (1987 CR 47:38) and question 36 at the 1988 Round Table (1988 CR 53:49).

The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.

Yours truly,

for DirectorReorganization and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch