11 June 1996 CTF Roundtable Q. 7, 9620750 - EXCESS DEBT ON ROLLOVER

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.

Canadian Tax Foundation
Corporate Management Tax Conference
June 14, 1996

Question 7 - Rollovers When Boot Exceeds ACB

Sometimes a full subsection 85(1) rollover appears to be impossible because debt payable that is to be assumed by the transferee corporation exceeds the ACB of the target assets to be transferred. Assumption of the debt as consideration for the assets would result in the agreed amount being deemed to be increased by paragraph 85(1)(b). It appears this can be solved by:

a) transferring the target assets as planned and having debt assumed up to the ACB of the target assets;

b) having the transferor issue a Note Payable to the transferee equal to the balance of the debt payable being assumed by the transferee; and

c) issuing shares of the transferee to the transferor for the remaining equity.

Shortly after this, the Note Payable by the transferor and an equal amount of share capital of the transferee are both cancelled by cross-redemptions.

A)Does Revenue Canada accept this as a valid method of avoiding the application of paragraph 85(1)(b) in this situation?

B)Would the answer be the same if the transferee only assumed the excess debt as consideration for redeeming some of its shares issued to acquire the target assets from the transferor?

C)Is the interest on all the debt assumed by the transferee corporation deductible under paragraph 20(1)(c)?

Department's Response

A)Yes. At the 1984 Round Table the Department indicated that paragraph 85(1)(b) would not be applied to this type of transaction. However, that position is presently under review by the Department. Once our review has been completed, our position will be announced publicly. In the meantime, our existing administrative position can still be relied on.

B)Yes.

C)Provided that:

(i) the target assets are acquired by the transferee for the purpose of gaining or producing income, and

(ii) interest on all the assumed debt was deductible by the transferor under paragraph 20(1)(c),

interest on all the assumed debt would ordinarily be deductible by the transferee. However, if any of the assumed debt is incurred by the transferor as part of the same series of transactions, the Department would have to review all the surrounding circumstances to determine whether the interest would be deductible to the transferee.

This position is also the subject of the review referred to above.

Author: Mark Symes
File: 5-962075
Date: June 10, 1996

ENDNOTES

1.It should be noted that subsection 55(2) could apply to the deemed dividends arising on the redemptions, unless the exceptions in paragraph 55(3)(a) or (b) applied.

2."Revenue Canada Round Table", in Report of Proceedings of the Thirty-Sixth Tax Conference, 1984 Conference Report, question 47 at 819.