19 May 1992 External T.I. 9129185 F - Interest Expense at a Time Where Shares are Reduced

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.

Attention:  19(1)

May 19, 1992

Dear Sirs:

Re:  Interest Deductibility following Corporate Reorganization

This is in reply to your letter of October 21, 1991 concerning the interest deductibility rules. You provide a hypothetical fact situation where a shareholder borrowed funds to purchase shares in a public corporation which subsequently reorganizes its capital, pursuant to subsection 86 of the Act, converting its shares into another class of participating shares, at a time when the fair market value of the shares has fallen by 50%.

In your letter you have outlined what appears to be an actual fact situation related to past transactions. The review of such transactions falls within the responsibility of District Taxation Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide you with the following general comments which we hope will be of assistance to you.

Our Comments

In our view, a decline in the value of an asset would not necessarily preclude the deductibility of the related interest expense. Where the shares are converted to another class of shares and the provision of subsection 86(1) of the Act apply to the shareholder, and the shareholder has not received any non- share consideration, we would expect the interest expense on his debt to continue to be deductible. However, if the shareholder receives non-share consideration, the deductible interest expense would be reduced accordingly.

The above comments are only expressions of opinion on the application of the Income Tax Act to the hypothetical examples given and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

We trust our comments will be of assistance to you

Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch