XXXX
C. Robb (613)957-2744
XXXX
November 20, 1989
Dear XXXX
Re: Deductibility of Interest
We are writing in response to your letter of October 4, 1989 wherein you have asked whether we are in agreement with your conclusions regarding the Department's response to a 1988 Round Table question. The question dealt with the deductibility of interest where a company borrowed to redeem shares issued in a tax deferred transaction and the Department's position that interest would only be deductible by reference to the paid-up capital of the shares redeemed. You have concluded that if subsequent to the tax deferral transaction the shares received by the transferor from the company are disposed of at their fair market value and the capital gain previously deferred is realized, interest deductibility on funds borrowed by the company to subsequently redeem those shares would not be restricted by reference to the paid-up capital of the shares.
The Department's position with respect to the above would depend on the facts of each particular case. In general, where the capital gain has not been sheltered from tax interest deductibility will not be restricted by reference to the paid-up capital of the shares redeemed.
The comments in this letter are of a general nature only. In accordance with paragraph 24 of Information Circular 70-6R, the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on the Department.
Yours truly,
for Director Financial Industries Division Rulings Directorate