2017 Ruling 2017-0696791R3 F - Reduction of PUC/capital -- summary under Subparagraph 20(1)(c)(i)

Background

Aco, a public corporation, wholly owns Xco and Yco, and all three corporations hold shares of Bco, which holds all the shares of Cco. Both Bco and Cco have accumulated profits and retained earning, and Cco has significant liquidity. Bco recently incorporated Newco, and subscribed for one common share. An interest-bearing loan is owing by Bco to Cco (the "Cco-Bco Loan")

Proposed transactions

1. Bco will transfer to Newco all its common shares of Cco on a s. 85(1) rollover basis in consideration for Newco issuing common shares and a demand non-interest bearing promissory note (the "Bco-Newco Note"), which is convertible after a specified period at the holder’s option into Newco common shares with an FMV equaling that of the note.
2. There will be a short-form amalgamation of Newco and Cco, so that the share capital of Amalco will be identical to that of Newco.
3. Bco will exercise its right to convert the Bco-Newco Note to common shares of Amalco.
4. Amalco will effect a reduction in the share capital account for its shares in cash, with Bco applying such cash to repay the Cco-Bco Loan owing to Amalco.
5. Amalco will borrow from arm’s-length lenders and use the proceeds in the share capital account for its shares held by Bco.

Rulings

Including that:

To the extent that the Borrowings [in 5] will replace capital of Amalco (i.e., of XXXXXXXXXX on the common shares of the capital stock of Amalco) that is being used by Amalco for eligible purposes, and that such capital will continue to be used for eligible purposes for the purposes of subparagraph 20(1)(c)(i), interest paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer’s income), pursuant to a legal obligation to pay interest on the borrowed money, will be deductible by Amalco in computing its income for the year pursuant to subparagraph 20(1)(c)(i). However, such interest will be deductible only to the extent that it is reasonable in the circumstances and provided that the deduction is not prohibited by any other specific provision of the Act.

For [such] purposes … the capital of Amalco attributable to the Bco-Newco Note and the XXXXXXXXXX of common shares of the capital stock of Amalco of $XXXXXXXXXX will be considered to be used by Amalco for eligible purposes for the purposes of subparagraph 20(1)(c)(i) provided that the property that will become property of Amalco on the amalgamation of Newco and Cco or the property that will be substituted therefor will be used and will continue to be used by Amalco for the purpose of gaining or producing income from its business.

In the supplementary letter, CRA ruled that the amount of "accumulated profits" of Amalco for purposes of the "filling the hole" concept for the purposes of paragraph 20(1)(c), would be a specified amount at the time of the amalgamation.