1 February 1996 External T.I. 9533055 - PROPOSED CORPORATE RE-ORG AND INTEREST DEDUCTIBILITY

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:

Whether interest is deductible on assumed debt on corp. re-org and amalgamation. What is the PUC after re-org and whether 84.1 applies

Position:

Question of fact. Sent him copies of conference answer and IT-489R. See officer analysis.

Reasons:

See officer analysis.

XXXXXXXXXX							5-953305

Attention: XXXXXXXXXX

February 1, 1996

Dear Sirs:

Re: Proposed Corporate Re-organization and Interest Deductibility

This is in reply to your facsimile of December 18, 1995 in which you request a technical interpretation with respect to proposed options for a corporate re-organization.

The situation described in your letter is an actual fact situation and written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2, a copy of which is enclosed.

In order to properly determine the tax consequences relating to the proposed corporate re-organization, we would need to examine all the agreements relating to the transaction. However we can offer the following general comments.

The Department's position with respect to the deductibility of interest on assumed debt was stated at the 1992 Canadian Tax Foundation Conference where we stated in response to round table question #3:

"Subparagraph 20(1)(c)(i) of the Act permits a deduction for interest on 'borrowed money', while subparagraph 20(1)(c)(ii) permits a deduction for interest on 'an amount payable for property acquired'. If a taxpayer assumes another person's indebtedness, it cannot be said that the taxpayer has 'borrowed money'. Consequently, subparagraph 20(1)(c)(i) is not applicable. If a taxpayer has assumed another person's indebtedness as part of the purchase price of an asset acquired by the taxpayer, the taxpayer will have 'an amount payable for property acquired' and thus, interest paid on that assumed indebtedness will be deductible to the extent provided for in subparagraph 20(1)(c)(ii)."

With respect to our position on section 84.1 of the Income Tax Act, we have enclosed a copy of Interpretation Bulletin IT-489R which deals with non-arm's length sale of shares to a corporation.

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