A small business corporation with nominal accumulated profits purchased for cancellation shares in its capital having nominal capital in consideration for the issuance by it of interest-bearing debt. After indicating that the indirect use test also extended to s. 20(1)(c)(ii), so that interest on the debt would be deductible to the extent of the capital of the repurchased shares, and the accumulated profits, that had been used in the corporation’s business, CRA stated:
Where only a portion of the debt obligation replaces eligible capital, as would be the case in the Particular Situation, it is our view that the amount that may be deducted as interest expense on the debt obligation is limited to the interest expense relating to that portion of the debt obligation.