21 July 1992 Roundtable, 9215040 F - Interested

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)

July 21, 1992

Dear 19(1)

Re:  Prairie Tax Conference Round Table Questions

This is in reply to your fax of May 13, 1992, concerning four questions you submitted to us regarding the interest deductibility rules as they would apply to various fact situations presented below.

The questions along with our responses are provided as follow:

Question 1

If a taxpayer borrows at 10% to purchase bonds at 7% is the interest deductible?  Is it relevant whether the rates are fixed?

Response

Current Position

Our policy in respect of this issue is outlined and limited to those situations described in the 1979 and 1981 conference report questions 3 and 39 respectively. As a result interest expense on money borrowed for purchasing bonds with a fixed rate which is less than the borrowing rate is not deductible.  If the interest rates are not fixed (ie: variable) the deductibility of any interest would depend on the particular facts of the situation as determined on a case by case basis.

Proposed Legislation

Our response to this question under the new draft legislation would be identical to the above.

Question 2

Are 20(1)(qq), 20(3.1) and 20.1 and 20.2 viewed as solely relieving provisions?  For example, if a shareholder borrows to buy additional common shares of his corporation and the conditions in paragraphs 20(3.1)(a),(b) are met, but not (c), would the interest be deductible under paragraph 20(1)(c)?

Response

Proposed Legislation

Assuming that the common shares were not acquired for the purpose of earning income, all the conditions of proposed paragraph 20(3.1) must be met in order for the interest to be deductible.

Question 3

If a taxpayer borrows $5,000 at 10% and uses $5,000 of cash to buy $10,000 of 7% preferred shares, would 20(1)(qq) apply?

Response

Current Position

See our answer to question 1 above and our response to question 26 in the 1987 CMTC.  The interest will not be fully deductible since the income earned with respect to the 50% of the investment will be less than the interest expense.

Proposed Legislation

We are unable to comment on proposed paragraph 20(1)(qq) at this time.

Question 4

Suppose Co. A acquires Target Co. for $20 million and Target Co. pays a dividend in kind to Co. A consisting of an interest free note of $20 million.  Co. A then borrows $20 million to pay a dividend and designates an allocation to the shares of Target Co.  Would the interest expense be deductible?

Response

We are unable to respond to your question as it appears that all of the facts of this hypothetical situation are not present.  We do not understand why Co. A would pay cash for Target Co. and then borrow for a dividend.  We also do not understand the purpose of the note or dividend.

We hope the above comments are of assistance to you.

Yours truly,

Section ChiefLeasing & FinancingFinancial Industries DivisionRulings Directorate