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.
xxxxx 5-9052
Peter Lee
(613) 957-2745
Attention: xxxxx
May 10, 1990
Dear Sirs:
Re: Interest Deductibility - Newly
Incorporated Branch Operation
This is in reply to your letters of November 7, 1989 and March 1, 1990. You requested our opinion on the incorporation of a Canadian branch of a foreign corporation and the deduction by the new taxable Canadian corporation of interest on funds borrowed to effect a distribution to its parent of amounts calculated by reference to the profits of the branch prior to the incorporation of the Canadian corporation. We regret that we were unable to provide an earlier reply.
It was proposed in the Notice of Ways and Means Motion on interest deductibility (the "Motion"), dated June 2, 1987 and amended on September 29, 1988 and November 24, 1989, that the expression"... borrowed money used for the purpose of earning income from a business or property..." in subparagraph 20(1)(c)(i) of the Income Tax Act (the "Act") will be defined to include borrowed money used by a corporation to pay dividends not exceeding its accumulated profits to the extent that such accumulated profits were used by the corporation for a qualifying purpose.
If an existing Canadian branch of a foreign corporation is incorporated as a subsidiary of the foreign corporation and the new taxable Canadian corporation borrows money to effect a distribution to its parent of amounts calculated by reference to the pre-incorporation profits of the parent's former Canadian branch, it is our opinion that the accumulated profits of the new corporation would not include the profits of the foreign corporation's former Canadian branch. Accordingly interest on such borrowed money would not satisfy the test for a deduction referred to in subparagraph (1)(a)(i) of the Motion.
Our opinion is provided in accordance with the practice described in paragraph 24 of Information Circular 70-6R.
Yours truly,
Original signed by
J.C. CLARK
for Director
Financial Industries Division
Rulings Directorate
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