On January 1, 2019, a new Canadian corporation is created by issuing $9,100,000 in debt securities and $2,100,000 in common shares. The debt securities pay interest at 7 percent. The new corporation will use December 31 as its year end. At the time the corporation is formed, Mr. Phillip Roundtree, who is a resident of England, acquires $5,250,000 of the debt securities and 29 percent of the common shares. On January 1, 2020 the Retained Earnings balance of the corporation is $750,000. How much, if any, of the interest paid in 2020 on Mr. Roundtree's holding of debt securities would be disallowed under the thin capitalization rules in ITA 18(4)?

Question

Quizplus · Accepted Answer

The Answer of On January 1, 2019, a new Canadian corporation is created by issuing $9,100,000 in debt securities and $2,100,000 in common shares. The debt securities pay interest at 7 percent. The new corporation will use December 31 as its year end. At the time the corporation is formed, Mr. Phillip Roundtree, who is a resident of England, acquires $5,250,000 of the debt securities and 29 percent of the common shares. On January 1, 2020 the Retained Earnings balance of the corporation is $750,000. How much, if any, of the interest paid in 2020 on Mr. Roundtree's holding of debt securities would be disallowed under the thin capitalization rules in ITA 18(4)?

On January 1, 2019, a New Canadian Corporation Is Created