CRA indicates that Amalco (successor to Buyco) is free to allocate assumed debt to retained rather than distributed Target assets for interest-deductibility purposes

After Buyco acquires Target (funded in part through the assumption of debt of the vendor – in this case, a non-arm’s length vendor), Buyco amalgamates with Target and then immediately makes a paid-up capital distribution of a portion of the acquired assets (being shares of FA) to its parent. CRA stated:

[T]aking into consideration the flexible tracing approach mandated… in Ludco…Amalco would be entitled to allocate the entire amount of the Assumed Debt to its assets other than the FA shares. Thus, the interest payable by Amalco on the Assumed Debt would be deductible under subparagraph 20(1)(c)(ii) after the distribution of the FA shares to the extent that the remaining assets are capable of producing income from property or from a business.

Neal Armstrong. Summary of 5 February 2016 Memo 2014-0555291I7 under s. 20(1)(c).