Current structure
Sub1 and Sub2 (both taxable Canadian corporations and wholly-owned subsidiaries of Parent) are currently the sole partners of a general partnership (“Partnership”). Partnership carried on an active business. Sub1 was indebted to Partnership under the demand non-interest bearing “Sub1-Partnership Note”), and Parent was indebted to Partnership under the “Parent-Partnership Note,” which was interest bearing and payable on demand.
Proposed transactions
- Sub1 will repay the Sub1-Partnership Note by assuming Partnership’s accounts payable.
- Sub1 will assume all indebtedness of Partnership, including the Partnership-Parent Note and Partnership’s obligation to pay “Employee Accruals” under various compensation and retirement plans in consideration for additional Partnership Units.
- Sub2 will transfer its interest in Partnership to Sub1 in consideration for Sub1 Preferred Shares and a non-interest bearing promissory note (the “Sub1 Note”), jointly electing under s. 85(1). As a consequence Partnership will cease to exist, Sub1 will become the sole owner of all the Partnership property and Sub1 will become subject to all the remaining obligations of Partnership, and immediately after the time that Partnership ceased to exist, Sub1 will carry on alone the business that was the business of Partnership.
Ruling
Interest paid or payable by Sub1 in respect of any debt obligation of Partnership, including the Partnership-Parent Note, assumed by Sub1 as a consequence of the dissolution of Partnership will be deductible by Sub1 under paragraph 20(1)(c) to the same extent that such interest would have been deductible by Partnership if Partnership did not dissolve provided that Sub1 uses the property acquired from Partnership for the purpose of earning income from a business or property (other than income which is exempt or property that is a life insurance property).