6 September 2002 External T.I. 2002-0151435 - fairness - opinion

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 CCRA.

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

Principal Issues : Is a fairness opinion deductible under 20(1)(bb)

Position: NO, but possibly under 9

Reasons: Wording of 20(1)(bb) and recent tax cases

XXXXXXXXXX 						2002-015143
C. Tremblay, CMA
September 6, 2002

Dear XXXXXXXXXX:

Re: Fairness Opinion re merger agreement Your Technical Interpretation Request #5 of 10

This is in reply to your letter of June 28, 2002, wherein you request a technical interpretation with respect to the following hypothetical situation.

You state that two taxable Canadian public corporations have entered into a merger agreement and subject to shareholder approval; shares of the one corporation ("Publico") will be issued to the shareholders of a second corporation ("Targetco") in exchange for their existing shares in the Targetco. The directors of Publico obtain a fairness opinion from an investment bank that in the opinion of the investment bank, the number of shares to be issued to the shareholders of the Targetco is fair to Publico.

In your view, the amount paid by Publico to the investment bank for the fairness opinion should be deductible under paragraph 20(1)(bb) of the Income tax Act (the "Act") as an amount paid for advice on the advisability of purchasing the shares of the Targetco. You ask us to assume that the principal business of the investment bank is advising others as to the advisability of purchasing or selling specific shares or securities, or includes the provision of services in respect of the administration or management of shares as required under subparagraphs 20(1)(bb)(iii) and (iv) of the Act.

Our Comments

It appears that this situation relates to a factual situation and a completed transaction, accordingly, it should be submitted to the appropriate taxation services office for their consideration. Our comments will, therefore, be of a general nature.

The Canada Customs and Revenue Agency (the "CCRA") has interpreted paragraph 20(1)(bb) of the Act to mean that in order for such fees paid to be deductible by a taxpayer, the fees must be paid either for advice on buying or selling a specific share or security by the taxpayer or for the administration or the management of the shares or securities of the taxpayer and the fees must be paid to a person whose principal business is advising others whether to buy or sell specific shares or whose principal business includes the administration or management of shares or securities. Whether or not certain fees are paid for advice as to the advisability of purchasing a specific share or security is a question of fact.

The CCRA is of the view that this provision is not applicable to taxpayers seeking to get an opinion as to the fairness of the number of shares that a corporation should issue in exchange for another corporation's shares. Therefore, in our opinion, paragraph 20(1)(bb) of the Act would not be available in respect of expenses incurred by a corporation on a merger or a take-over bid.

However, based on the decision in The Queen v Boulangerie St-Augustin Inc. (97 DTC 5012) (FCA) it is the CCRA's view that expenses incurred to meet the obligations imposed under a Securities Act and/or Business Corporations Act in advising shareholders concerning take-over bids would generally be deductible under subsection 9(1) of the Act, provided these expenses are reasonable. These expenses would normally include legal, accounting fees, costs of obtaining fairness opinions (valuation reports) and printing and mailing costs.

We trust the following comments are of assistance.

Yours truly,

Steve Tevlin
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch