21 March 1994 External T.I. 9406455 - INTEREST DEDUCTIBILITY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

DOCUMENT TYPE:

Opinion

ACCESS TO INFORMATION:

This Correspondence CAN be Released Under ATIP

Principal Issues:

Deductibility of interest on money borrowed to pay dividends

Position TAKEN:

general position

Reasons FOR POSITION TAKEN:

policy

LEGAL:

Not Applicable

FINANCE OPINION:

Not Applicable

JURISPRUDENCE:

RCT PUBLICATIONS:

IT-80

HAA NUMBER:

6148-1

		940645
XXXXXXXXXX	M. Cooke

Attention: XXXXXXXXXX

March 21, 1994

Dear Sirs:

Re: Interest on Money Borrowed to Pay Dividends

This is in reply to your letter of March 8, 1994, in which you requested our views concerning the deductibility of interest paid by a corporation on money borrowed and used to pay dividends.

The Department intends to maintain its current administrative practice with respect to the deductibility of interest as described in paragraph 5 of IT-80. Therefore, where such borrowings do not exceed a corporation's "accumulated profits" generated from qualifying income earning activities, the interest on the borrowings will generally be deductible. The Department defined "accumulated profits" in our response to question 8 of the Corporate Management Tax Conference as being:

"...accounting profits computed on an unconsolidated basis with investments accounted for on a cost basis. Appraisal surplus and profits resulting from non-arm's-length transactions designed to transform appraisal surplus into profits would not form part of accumulated profits. Accumulated profits need not be allocated proportionally among shareholders."

Therefore, it is the Department's view that accumulated profits do not include any appraisal surplus and profits resulting from non-arms-length transactions that transform appraisal surplus into accumulated profits either on a taxable, non-taxable or tax deferred basis.

Finally, we assume that the definition of "adjusted equity" under draft subsection 20.2(2) of the proposed interest legislation released on December 21, 1991, will upon implementation, accurately reflect our existing practice for any such borrowings entered into before the date on which the draft interest legislation is issued in final form.

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 the Department.

Yours truly,

for Acting Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch