13 March 1998 External T.I. 9804035 - INTEREST DEDUCT. AFTER LUDCO?

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:

Has the Department’s position on the deductibility of interest on funds borrowed to invest in common shares changed as a result of the recent decision of the Federal Court Trial Division in Ludco Enterprises Limited et al v. The Queen, 98 DTC 6045 (FCTC)?

Position TAKEN:

The results in Ludco do not result in any change in the Department’s administrative practice.

Reasons FOR POSITION TAKEN:

The decision by the Federal Court Trial Division in Ludco affirms our position as stated in response to question # 39 at the 1981 Tax Conference.

XXXXXXXXXX 980403
P. Diguer

Attention: XXXXXXXXXX

March 13, 1998

Dear Sir/Madam:

Re: Interest Deductibility

This is in reply to your letter dated February 17, 1998 in which you requested whether the Department’s administrative position on the deductibility of interest on funds borrowed to invest in common shares has changed as a result of the recent decision of the Federal Court Trial Division in Ludco Enterprises Limited et al v. The Queen, 98 DTC 6045 (FCTC) (“Ludco”) .

The decision in Ludco affirms the Department’s long standing general position with respect to moneys borrowed to purchase common shares as stated at the 1981 Canadian Tax Conference:

Normally the Department considers interest costs in respect of funds borrowed to purchase common shares to be deductible on the basis that the potential return (such as dividends or interest but not including capital gains) to the common shareholder may exceed the shareholder’s borrowing cost. It is conceivable that in certain fact situations it would be quite unreasonable to expect a potential return in excess of the borrowing cost related to such shares. We do not have any guidelines that might be used to isolate such situations and feel each situation must be dealt with on the basis of the facts involved.

The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in IC 70-6R3 they are not binding on Revenue Canada, Customs, Excise and Taxation.

Yours truly,

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