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.
Principal Issues:
deductibility of interest- new debt to repay old debt
Position TAKEN:
interest on new debt deductible
Reasons FOR POSITION TAKEN:
20(1)(c) & 20(1)(e)
August 24, 1994
Halifax District Office Financial Industries
N. B. Squires Division
Director S.J. Tevlin
(613) 957-2746
Attention: Kevin McGuigan
Technical Advisor
942051
Interest Deductibility
We are writing in response to your memorandum dated August 8, 1994 wherein you requested our opinion as to the deductibility of interest on borrowed money that is used to pay out a credit balance in a shareholders loan account.
Facts
The major portion of the shareholders loan account was created upon the incorporation of the shareholder's former proprietorship. The assets of the proprietorship were transferred to the corporation for consideration that consisted of common shares and a note payable to the shareholder. The remaining balance of the shareholder loan account credit balance resulted from salaries and dividends which were loaned to the corporation to earn business income.
You have asked us to confirm that the interest on a loan from a financial institution, that is used to repay the current credit balance in the shareholder loan account, would be deductible pursuant to paragraph 20(1)(c) and subsection 20(3).
Where a taxpayer uses borrowed money to pay an amount payable for property acquired for the purpose of gaining or producing income from a business as described in subparagraph 20(1)(c)(ii) of the Act, the borrowed money is deemed, under subsection 20(3) of the Act, to have been used to acquire the property in respect of which the original amount was payable.
Where the proceeds from balance of the loan made by the shareholder to the corporation were used by the corporation for the purpose of earning income from its business, subsection 20(3) deems the proceeds of the new loan from the institutional lender to be used for the same purpose.
It is therefore our opinion that interest on the amount borrowed in order to repay the shareholder loan account would be deductible to the corporation.
We trust our comments will be of assistance to you.
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
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