| 19(1) | File No. 5-9219 |
| P. Diguer | |
| (613) 957-2120 |
January 17, 1990
Dear Sirs:
Re: Subsection 245(2) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter dated December 6, 1989 wherein you requested our opinion regarding the application of subsection 245(2) of the Act to the following hypothetical situation.
Facts
1. Mr. B owns 100% of the common shares of Opco, a Canadian-controlled private corporation as defined in paragraph 125(7)(b) of the Act.
2. Mr. A purchases all the shares of Opco from Mr. B. Mr. A borrows the necessary funds from an unrelated third party.
3. Mr. A and Mr. B deal at arm's length.
4. A new taxable Canadian corporation ("Newco") is created. Mr. A transfers all the shares of Opco to Newco, electing under the rollover provisions of subsection 85(1) of the Act. As consideration for this transfer Newco assumes the related debt incurred by Mr. A and issues to Mr. A common shares of Newco.
5. Opco and Newco are subsequently amalgamated pursuant to the provisions of subsection 87(1) of the Act.
Upon reviewing the above summarized transactions you are concerned that the provisions of subsection 245(2) of the Act may apply and thereby deny the interest expense deduction to the amalgamated corporation, on the borrowed funds outlined in paragraph 2 above.
Our Comments
Briefly, it is the Department's position that interest paid or payable in the year, may be deducted under paragraph 20(1)(c) of the Act on loans such as the one described in paragraph 2 above provided they relate to a business or property income source and otherwise satisfy the requirements of the said paragraph of the Act.
In situations where the income source and the related debt are disposed of, such as in the case described in paragraph 4 above, interest paid or payable by the acquiring company, from the date of assumption of the debt in question, would be deductible provided the amount continues to be used by the acquiring corporation as required by that paragraph.
In situations where the source of income and the related debt are acquired by a new corporation created upon the amalgamation of two or more predecessor corporations it is the Department's position to allow, under certain conditions, continued interest deductibility. This departmental policy is outlined in paragraph 31 and paragraph 2 of interpretation bulletins IT-474 and IT-315, respectively.
It is a question of fact whether the transfer by Mr. A to Newco of all the shares of Opco and the assumption of the related debt, by Newco as well as, the subsequent amalgamation of Newco and Opco, would be avoidance transactions within the meaning of subsection 245(3) of the Act. However, on the assumption that such transactions do constitute avoidance transactions, in our opinion, the transactions described above would not result directly or indirectly in a misuse of the provisions of the Act or an abuse of the provisions of the Act read as a whole and subsection 245(2) would not apply.
Please note that we have not, in formulating the above comments, taken into account any draft legislation that might relate to the issues raised by you.
The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch