After a portion of the restaurant business of corporation (Corporation A) was spun off to a second corporation (Newco) in reliance on the s. 55(3)(a) exception and with the use of special voting-control shares in favour of the patriarch (A), with the two children of A (X and Y) then using interest-bearing loans to purchase most of the shares (being, in part, preferred shares) of Corporation A or Newco. Each child transferred such shares to a new holding company (Holdco X or Holdco Y) in consideration for preferred shares of such holding company and the assumption by it of the interest-bearing loans, with each such holding company then potentially amalgamating with Corporation A or Newco, as the case may be.
CRA indicated that the interest on such assumed debt would not be deductible to Holdco X or Holdco Y to the extent that the acquired shares were non-dividend-bearing preferred shares rather than common shares, and then went on to state:
[A]fter the amalgamation, we consider the debt to have been assumed for the acquisition of the assets from the predecessor companies Corporation A or Newco, as the case may be, in lieu of the acquisition of the shares. If the assets from the predecessor companies Corporation A or Newco, as the case may be, were acquired for the purpose of gaining or producing income from an income or business and all other conditions required for interest deductibility were satisfied, interest on the assumed debt would be deductible to the new corporations resulting from the amalgamations.