| 24(1) | 901480 |
| M. Vallée | |
| (613) 957-8953 |
19(1)
November 16, 1990
Dear Sirs:
Re: Interest Deductibility under Paragraph 20(1)(c) of the Income Tax Act in a Leveraged Buy-Out and Merger Situation
This is in reply to your letter dated June 22, 1990, whereby you requested our opinion in the following hypothetical situation.
Corporation A borrows money and uses it to acquire all the shares of corporation B, with which corporation A then amalgamates.
You requested confirmation that, regardless of the quantum of accumulated profits that may have been on hand in corporation B immediately before the transaction, the amalgamated corporation could deduct the full amount of the interest on the borrowed money, even though the particular assets acquired with the borrowed funds (i.e. the shares of corporation B) would be eliminated in the course of the leveraged buy-out.
We wish to confirm to you that our response to question 18 at the Round Table at the 1987 Corporate Management Tax Conference of the Canadian Tax Foundation continues to represent our position concerning interest deductibility in such circumstances. That response was as follows:
The practice described in IT-315 and paragraph 31 of IT-474R will be continued. Generally, we have not applied the accumulated profits test to transactions described in the bulletin. There would be no difference in treatment if corporation B were wound up into, instead of being amalgamated with, corporation A.
The foregoing response is our opinion provided in accordance with the practice described in paragraph 21 of Information Circular 70-6R2, and is not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and intergovernmental Affairs Branch