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:
Deductibility of interest on borrowed funds used to repay capital. Whether the term capital refers to the accounting concept or tax amount
Position:
In arm's length transactions, we look to the accounting concept. In non-arm's length transactions we would not allow interest deductibility on funds borrowed to pay dividends from appraisal surplus.
Reasons:
Consistent with positions taken in file 5-2805 and E 57242. Also consistent with comment at the 1988 CMTC.
971876
XXXXXXXXXX F. Francis
Attention: XXXXXXXXXX
July 16, 1997
Dear Sirs:
This is in reply to your facsimile dated July 11, 1997, wherein you requested our interpretation of the phrase "paid up capital" as used in Revenue Canada's answer to Question 1 of the Revenue Canada Forum at the Corporate Management Tax Conference 1996 respecting interest deductibility.
We confirm that interest on money borrowed by a corporation to repay capital on the redemption, acquisition or cancellation of a share is generally deductible pursuant to paragraph 20(1)(c) of the Income Tax Act provided that the borrowed funds do not exceed the aggregate of the capital of the shares to be redeemed and the accumulated profits determined immediately before to the extent that the capital and accumulated profit was used by the corporation for a qualifying purpose. We further confirm that the terms "capital" and "accumulated profits" will refer to the accounting concepts of those terms where assets have been acquired in an arm's length transaction.
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
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