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 the interest payable on a promissory note issued by a corporation as payment of a dividend is deductible under paragraph 20(1)(c).
Position TAKEN:
Not deductible.
Reasons FOR POSITION TAKEN:
Firstly, the note does not constitute “borrowed money” and as a consequence subparagraph 20(1)(c)(i) is inapplicable and the administrative position outlined in IT-80 would not be available. Secondly, the note is not an amount payable for property acquired by the corporation to earn income from its business and therefore subparagraph 20(1)(c)(ii) is also not applicable. Moreover, this position is consistent with previous pronouncements in connection with this issue (see for example, file # 960854, file # 940645, file # 5-5970 and Technical News # 3 page 6).
XXXXXXXXXX 5-981261
P. Diguer
June 24, 1998
Dear Sir/Madam
Re: Interest deductibility
This is in reply to your letter dated March 20, 1998, which we received in our office on May 13, 1998, in which you requested our views with respect to a situation where a corporation declares a dividend and issues as consideration therefor an interest bearing note. At issue is whether the interest payable on the promissory note is deductible under paragraph 20(1)(c) of the Income Tax Act (Canada) (the “Act”).
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996. This Directorate also provides technical interpretations of the various provisions of the of the Act but we do not provide tax planning advice.
The facts outlined in your letter appear to relate to actual proposed transactions involving particular taxpayers and therefore a binding determination from the Department regarding the applicability or the inapplicability of any provision of the Act can only be obtained by way of an advance income tax ruling request following the procedures outlined in IC-70-6R3. Nevertheless, we offer the following general comments in connection with your request which we hope is of assistance to you.
It is the Department’s view that interest payable on a promissory note issued in payment of a dividend is not deductible under paragraph 20(1)(c) of the Act. The basis for this view is that since the note does not constitute “borrowed money” subparagraph 20(1)(c)(i) is inapplicable and the administrative position outlined in IT-80 would not be available. Secondly, the note is not an amount payable for property acquired by the corporation to earn income from its business and therefore subparagraph 20(1)(c)(ii) is also not applicable.
Furthermore, any attempt to refinance such a note with money borrowed from a third party, would generally result in the application of subsection 20(3) so that the borrowed money would be deemed to have been used for the same purpose as the note was used, which, as we have indicated, is a non-qualifying purpose.
We trust our comments will be of assistance to you. The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in IC 70-6R3 they are not binding on Revenue Canada.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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