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.
July 29, 1993
| LAVAL DISTRICT OFFICE |
HEAD OFFICE |
| Basic Files |
Rulings Directorate |
| |
C. Tremblay |
| |
(613) 957-2744 |
Attention: Noël Frenette
Investment by Way of Contributed Surplus
This is in reply to your telephone enquiry of April 20, 1993, regarding the deduction of interest on borrowed funds by XXXXXXXXXX
The true purpose for which the borrowed money was used is relevant in determining whether the interest expense will be allowed as a deduction. In the case of money borrowed to invest by means of a contribution of capital in a corporation of which the taxpayer owns all the shares, the purpose is generally to earn income from dividends or increased dividends generated from income earned by a subsidiary of the corporation. Accordingly, in our view, the deduction of interest should not be denied to a Canadian corporation that borrows funds to invest in a subsidiary, by way of contributed surplus provided the funds are to be used in a business to earn income and it is reasonable to expect that dividends will be earned by the Canadian corporation in the foreseeable future. Whether a corporation has invested the funds in a business and whether it is reasonable to expect dividends to be earned by the parent corporation is a question of fact that can only be determined on a case by case basis.
XXXXXXXXXX
In the case at hand, the particular facts relating to the subsidiary corporations should be reviewed to ensure it is reasonable to expect that income will be earned and will be paid through the various subsidiaries to the Canadian parent corporation.
We trust our comments will be of assistance to you
for DirectorFinancial Industries DivisionRulings Directorate
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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