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.
1994 Canadian Tax Conference
Interest-Bearing Note Issued in Consideration
For the Redemption or Repurchase of Shares
In certain circumstances, corporations may purchase their issued shares for cancellation or redeem their shares and issue as consideration therefor an interest-bearing note. The issue then becomes whether the interest payable on the note is deductible under paragraph 20(1)(c) of the Act.
It is the Department's view that the interest payable on a promissory note issued as consideration for the redemption or purchase for cancellation of a corporation's capital stock is not deductible under paragraph 20(1)(c). The basis for this view is that since the note does not constitute "borrowed money", subparagraph 20(1)(c)(i) is inapplicable and the administrative position outlined in IT-80 would not be available. Secondly, the note is not an amount payable for property acquired by the corporation to earn income from its business or from the shares so acquired and therefore subparagraph 20(1)(c)(ii) is also inapplicable.
Furthermore, any attempt to refinance such a note with money borrowed from a third party, would generally result in the application of subsection 20(3) so that the borrowed money would be deemed to have been used for the same purpose as the note was used, which, as we have noted, is a non-qualifying purpose. These views are consistent with the findings of the Tax Court of Canada in Parthenon Investments Limited v. The Queen, 93 DTC 1171.
It is also the Department's view that a deduction would not be available under the draft interest provisions (proposed subsection 20.2(1)) as these provisions also require the existence of "borrowed money".
These results have been brought to the attention of the Department of Finance.
Tim Bryant
November 30, 1994
942870
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