24 April 1996 External T.I. 9608545 - 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.

Principal Issues:

Proposed legislation of draft subsection 20.2(2) and what is the definition of borrowed money with respect to the distribution of a dividend.

Position:

This is an actual factual situation and as such gave general comments which are related to his transaction.

Reasons:

routine

XXXXXXXXXX 5-960854

Attention: XXXXXXXXXX

April 24, 1996

Dear Sirs:

Re: Interest Deductibility

This is in reply to your letter of February 23, 1996 in which you request a technical interpretation on the draft subsection 20.2(2) of the proposed interest legislation released December 21, 1991.

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.

In addition, 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.

With respect to whether or not the dividend distribution will be regarded as having been made from borrowed money, we are of the opinion that the deduction for interest on borrowed money would not extend to interest on interest bearing notes issued to shareholders in payment of a dividend in kind.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch