Principal Issues: Whether interest payable at prescribed rate deductible by borrower?
Position: Unlikely
Reasons: Insufficient facts and the general anti-avoidance rules may apply.
XXXXXXXXXX 2006-019962 S. Chua March 29, 2007
Re: Interest Deductibility
This is in reply to your emails of July 31 and August 9, 2006 regarding interest deductibility. The situation you describe involves circular non-arm's length transactions regarding loans, contracts, shares and repayment (or forgiveness) of debt.
Our Comments
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advanced income tax ruling request. For more information concerning advance income rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Copies of information circulars are available at your local Tax Services Office or on the Internet at http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office with all the particular facts. However, we are prepared to provide the following general comments.
A number of tax consequences could arise in the situation you describe, including but not limited to non-deductibility of interest and a taxable benefit arising from a loan to a person connected to a shareholder. The application of the general anti-avoidance rule ("GAAR") would also be considered in the type of situation you describe. Whether or not GAAR would apply in a particular case would be dependent on the tax consequences otherwise determined and on the specific facts in the case. Where a series of transactions is entered into merely to derive the benefit of interest deduction or the avoidance of the debt forgiveness rules, GAAR may be relevant.
We trust that the above comments will be of assistance.
Yours truly,
Roberta Albert, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate