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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Request For Technical Interpretation
We are writing in response to your letter of May 26, 1993, in which you requested our comments with respect to the deductibility of interest pursuant to subsection 20(1)(c) of the Income Tax Act (Canada) in the following hypothetical situation.
"Money is borrowed by a taxpayer for the purpose of acquiring common shares of a corporation. Some years later, the paid-up capital of the shares is reduced, triggering a dividend, the proceeds of which are reinvested in either:
1) common shares (though not necessarily of the same type) of the corporation or of another corporation, or
2) property which is not acquired for the purpose of earning or producing income.
Under either of these alternatives, the value of the original common shares, after the paid-up capital ("PUC") reduction, will at all times exceed the amount of the borrowing."
In regard to the above facts you have asked whether the interest expense incurred on the borrowing would continue to be deductible, notwithstanding that the PUC of the shares initially acquired with the borrowed funds has been reduced.
Comments
It is our opinion that the interest expense incurred on the borrowing will continue to be deductible, notwithstanding that the PUC of the common shares initially acquired with the borrowed funds has been reduced.
However, other factors pertaining to a particular situation may result in a different conclusion or the application of other provisions of the Act.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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