16 March 1998 External T.I. 9805355 - MONEY BORROWED TO PAY DIVIDENDS

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:

Whether, in determining "accumulated profits" for purposes of the deductibility of interest on money borrowed to pay dividends, the amount of a writedown recorded by a corporation for accounting purposes in respect of an investment in a subsidiary corporation can be added back to "accumulated profits".

Position:

The amount of the writedown cannot be added back.

Reasons:

The writedown is equivalent to a realization of the loss resulting from the decrease in the value of the investment.

XXXXXXXXXX 		5-980535
C. Chouinard
Attention:  XXXXXXXXXX 

March 16, 1998

Dear Sir:

Re: Interest on Money Borrowed to Pay Dividends

This is in reply to your letter of March 4, 1998 regarding the Department's administrative practice with respect to interest on money borrowed to pay dividends.

As indicated in paragraph 5 of Interpretation Bulletin IT-80, where the amount of borrowings to pay dividends does not exceed a corporation's "accumulated profits" generated from qualifying income earning activities, the interest on the borrowings will generally be deductible. The Department has defined "accumulated profits" as being "accounting profits computed on an unconsolidated basis with investments accounted for on a cost basis and without including appraisal surplus and profits resulting from non-arm's length transactions designed to transform appraisal surplus into profits".

You inquire whether, in determining "accumulated profits", the amount of a writedown recorded by a corporation for accounting purposes in respect of an investment in a subsidiary corporation can be added back to "accumulated profits". In your view, since the writedown was not realized as a result of an arm's length transaction, the accounting loss should be excluded from "accumulated profits", thereby increasing "accumulated profits" by the amount of the writedown.

In our view, where, as in the situation described above, a corporation records a writedown for accounting purposes, it is in effect recognizing that the profits used in making the investment are no longer available to be used in the business. Accordingly, the writedown is equivalent to a realization of the loss resulting from the decrease in the value of the investment and cannot, in our opinion, be added back to “accumulated profits”.

We trust these comments will be of assistance.

Yours truly,

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