2005 Ruling 2005-0115271R3 - 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.

Principal Issues: Minor changes and extension of delay

Position: Granted

Reasons: Minor Changes only

XXXXXXXXXX  						2005-011527 

XXXXXXXXXX, 2005

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request on behalf of the above named taxpayer (Mco) an extension of the deadline for the implementation of the proposed transactions described in our Advance Income Tax Ruling (the Ruling) dated XXXXXXXXXX, 2004 (our file number 2004-006195) as amended on XXXXXXXXXX, 2004 (our file number 2004-010847). In addition you advise us that certain facts and proposed transactions are changed from those presented in the Ruling.

As requested, the Ruling issued on XXXXXXXXXX, 2004, as amended on XXXXXXXXXX, 2004, is amended as follows:

18. Mco owns all XXXXXXXXXX issued and outstanding common shares of Nco having a fair market value of $XXXXXXXXXX, an adjusted cost base of $XXXXXXXXXX (as a result of the bump under 10 above) and nominal paid-up capital.

Mco will incorporate a new wholly owned subsidiary, Oco, by subscribing for common shares for nominal consideration.

Mco will transfer its XXXXXXXXXX issued and outstanding common shares of Nco to Nco for consideration equal to XXXXXXXXXX preferred shares of Nco and XXXXXXXXXX common shares of Nco. The preferred shares will be non-voting, with an annual cumulative dividend of XXXXXXXXXX% of the redemption amount of the shares as and when declared by the Board of Directors of Nco, redeemable at the option of Nco for a redemption amount equal to $XXXXXXXXXX per share, convertible at the option of the holder into XXXXXXXXXX common shares and giving to the holder, upon dissolution, entitlement to a payment in priority to the holders of the common shares of an amount equal to the redemption amount. The XXXXXXXXXX common shares of Nco transferred by Mco will be cancelled.

Mco and Nco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the disposition of shares of Nco by Mco. The agreed amount in respect of the shares disposed of by Mco will be equal to $XXXXXXXXXX.

The aggregate amount added to the stated capital accounts maintained for Nco's new preferred and common shares issued will not exceed the paid-up capital of the common shares disposed of by Mco.

23. Mco will receive permission from its bank to initiate a $XXXXXXXXXX (the Amount) fund transfer to Oco which will result in Mco going into an overdraft position after the making of the loan described in 24 below.

24. Mco will lend the Amount by means of a demand loan (the "Loan") to Oco. The terms of the loan will be as follows: annual interest of XXXXXXXXXX%; interest paid XXXXXXXXXX; XXXXXXXXXX year term; renewable on the agreement of the parties and repayable without penalty on XXXXXXXXXX notice. The XXXXXXXXXX% interest rate is based on Mco's historical intercompany, unsecured financing rate and is consistent with a non-investment grade rate (single or double B rating) which averages between XXXXXXXXXX% and XXXXXXXXXX%.

25. Oco will use the Amount received under the Loan to subscribe for XXXXXXXXXX common shares of Nco.

26. Nco will use the Amount received as a result of the share subscription to redeem the preferred shares held by Mco having a fair market value equal to the Amount.

27. Mco will use the Amount received as a result of the share cancellation to settle its bank overdraft position.

28. Mco will dispose of its XXXXXXXXXX common shares of Nco to Oco and Oco will issue common shares to Mco as consideration for the common shares of Nco. Mco and Oco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provision of subsection 85(1) apply to the disposition of the common shares of Nco by Mco.

Provided that the preceding statements and the statements set out in the Ruling issued on XXXXXXXXXX , 2004 constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, that the transactions are legally effective, that Amalco has a legal obligation to pay interest on the Loan described in 24 above and provided that the transactions are completed as proposed, we rule as follows:

B. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer described in paragraph 22.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 issued by the Canadian Revenue Agency (CRA), and is binding provided the proposed transactions are completed by XXXXXXXXXX.

This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted the fair market value, the adjusted cost base or the paid-up capital of any share referred to in this letter.

We also confirm that the Ruling dated XXXXXXXXXX, 2004 (our file 2004-006195), as amended herein, remains binding on the CRA subject to the same limitations and qualifications set out in the Ruling, provided that the proposed transactions are completed by XXXXXXXXXX. In addition, the ruling dated XXXXXXXXXX, 2004 (our file number 2004-010847) is cancelled.

Yours truly,

XXXXXXXXXX
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch