| 19(1) | File No. 5-9730 |
| S. Leung | |
| (613) 957-2116 |
April 30, 1990
Dear Sirs:
Re: Interest Deductibility and Interpretation Bulletin IT-315
We are writing in response to your letter of February 27, 1990 in which you requested a technical interpretation as to whether the interest expense would be deductible in the following hypothetical fact situation which was outlined in your letter.
SITUATION
1. Purchaser Company is incorporated under the laws of British Columbia for the purpose of acquiring all of the issued and outstanding common shares of an operating company ("Opco") in an arm's length acquisition.
2. Purchaser Company will borrow, at interest, the required funds to purchase the common shares of Opco.
3. Subsequent to the acquisition of the common shares of Opco by Purchaser Company, the shareholders of Purchaser Company will transfer all of their shares of Purchaser Company to Opco and, as sole consideration for the transfer, will receive shares of Opco. An election pursuant to subsection 85(1) of the Income Tax Act (the "Act") may or may not be made with respect to the transfer.
4. Purchaser Company will then be wound up into Opco.
You have informed us that the purpose of the above-noted series of transactions is to facilitate the merging of Purchaser Company and Opco in the most expeditious manner. It is your opinion that such arrangement would not result in either British Columbia property purchase tax or sales tax or in other administrative costs in respect of re-documenting leases and other agreements of Opco. Such costs would be incurred if Purchaser Company were amalgamated with Opco or if Opco were liquidated into Purchaser Company. As a result of the winding-up of Purchaser Company into Opco, Opco will have assumed the debt of Purchaser Company which was originally incurred by the latter to acquire the shares of Opco. You requested our views as to whether the interest on such debt would be deductible by Opco.
OUR COMMENTS
The situation outlined in your letter appears to involve actual proposed transactions with identifiable taxpayers. Confirmation as to the tax consequences of actual proposed transactions can only be provided in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R dated December 18, 1978 issued by Revenue Canada, Taxation and the related Special Release thereto. However, we can offer the following general comments.
In formulating the following comments, we have assumed that
(i) under the laws of British Columbia, a corporation can own 100% of the shares of another corporation which simultaneously owns shares of the first-mentioned corporation;
(ii) Opco was incorporated under the laws of British Columbia;
(iii) each of Purchaser Company and Opco is a taxable Canadian corporation within the meaning assigned by paragraph 89(1)(i) of the Income Tax Act (the "Act"); and
(iv) Purchaser Company will be wound up into Opco pursuant to subsection 88(1) of the Act.
Firstly, in the hypothetical situation outlined above, when Opco assumes the debt of Purchaser Company as a result of the winding-up of the latter company, it cannot be said that Opco borrows money used for the purpose of earning income from a business or property pursuant to subparagraph 20(1)(c)(i) of the Act.
Also, the interest that will be incurred by Opco after the winding-up of Purchaser Company cannot be said to be paid by Opco on an amount payable for property acquired for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business, pursuant to subparagraph 20(1)(c)(ii) of the Act. As it appears that the only asset of Purchaser Company is the common shares of Opco, the only property that can be said to have been "acquired" by Opco as a result of the winding-up of Purchaser Company is its own shares. However, even if these shares were not cancelled after their acquisition by Opco, they will not be a source of income to Opco because subsection 262(2) of the Company Act of British Columbia clearly prohibits a company from paying dividends on the shares held by itself. Therefore, these shares cannot be said to have been acquired by Opco for the purpose of gaining or producing income therefrom or from a business.
Interpretation Bulletin IT-315 outlines the Department's position on the deductibility of interest expenses in certain circumstances where the requirements of paragraph 20(1)(c) of the Act may not otherwise be met. The position outlined in IT-315 represents an administrative concession and the Department does not intend to extend this administrative concession to the situation outlined in, your letter.
In view of the above, it is our view that, in the hypothetical situation outlined in your letter, the interest on funds originally borrowed by Purchaser Company for the purpose of acquiring shares of Opco would not be deductible by Opco.
We trust our comments will be of assistance.
Yours truly,
T. Harrisfor DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch