28 October 1997 External T.I. 9726695 - INTEREST EXPENSE CLAIMED BY AMALGAMATED CORPORATION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1)whether IT-315 position applies to amalgamated corporation with respect to assumption of debt for property acquired by predecessor corporation to earn non-exempt income and which is still used by amalgamated corporation for this purpose;

2)whether 20(3) applies to deem new loan by amalgamated corporation taken out to repay amount payable by it because of its assumption of such a debt to be for same purpose as assumed loan.

Position:

1) Yes;

2) yes.

Reasons:

1)Long-standing position that amalgamated corporation may deduct interest expense so long as it relates to debt assumed re property acquired on the amalgamation which is still used by amalgamated corporation to earn non-exempt income;

2)20(3) deems new loan which replaces old loan to be used to acquire same property as acquired by old loan.

	                                  	972669
XXXXXXXXXX                                	P. Spice

Attention: XXXXXXXXXX

October 28, 1997

Dear Sirs:

Re: Paragraph 20(1)(c) and Subsection 20(3) of the Income Tax Act (the "Act")

This is in reply to your letter of September 30, 1997, in which you describe a hypothetical situation and ask for our interpretation concerning the application of the above-noted provisions.

It appears that the situation you describe concerns a completed or proposed transaction and we are unable to provide any confirmation of the tax consequences except, with respect to a proposed transaction, in the context of an advance income tax ruling. Confirmation of the tax consequences respecting a completed transaction must be obtained from the local tax services office. We can offer, however, the following general observations.

Interpretation Bulletin IT-315 ("Interest Expense Incurred for the Purpose of Winding-up or Amalgamation") confirms the Department's position that if all the requirements of paragraph 20(1)(c) of the Act are otherwise satisfied, an interest expense incurred by a Canadian corporation on a loan taken out to acquire shares of a corporation which is subsequently amalgamated with the acquiring corporation pursuant to section 87 of the Act, may be deductible by the acquiring corporation. Other conditions which apply for the interest expense to be deductible to either the acquiring corporation or the amalgamated corporation are described in more detail in the Interpretation Bulletin.

As you point out, in a technical interpretation of February 1, 1996 (document number E9533055), we expressed the view that where a debt is assumed upon a corporate reorganization, the deductibility of interest is governed by the provisions of subparagraph 20(1)(c)(ii) of the Act rather than subparagraph 20(1)(c)(i) of the Act.

With respect to the application of subsection 20(3) of the Act, where an amalgamated corporation borrows money to pay an amount payable for property described in subparagraph 20(1)(c)(ii) of the Act previously acquired, the money borrowed is deemed to acquire the property in respect of which the amount was payable. As you note, we are of the opinion as expressed in a memorandum of February 12, 1996 (document number E951791A), that where an amalgamated corporation assumes the debts and liabilities of an arm's length predecessor corporation, and the amalgamated corporation refinances an assumed loan, subsection 20(3) of the Act applies to deem the amount refinanced to acquire the property, the original purchase of which was financed by the predecessor corporation with proceeds from the assumed loan.

Although the foregoing comments are not binding on the Department, we trust they assist.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch