18 March 2003 External T.I. 2002-0151445 - 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)(e)

Position: NO .

Reasons: 20(1)(e) applies to expenses directly related to an issue of shares.

XXXXXXXXXX 						2002-015144
C. Tremblay, CMA
March 18, 2003

Dear XXXXXXXXXX:

Re: Fairness Opinion Your Technical Interpretation Request #6 of 10

This is in reply to your letter of June 28, 2002, wherein you request a technical interpretation with respect to a hypothetical situation where a corporation will issue new shares to the public in a secondary offering. The director's of the corporation obtain a fairness opinion from an investment bank that in their opinion, the terms of the share issuance is fair to the existing shareholders.

In your view, the amount paid by the corporation to the investment bank for the fairness opinion should be deductible under paragraph 20(1)(e) of the Income Tax Act (the "Act") as an expense incurred in the course of an issuance of shares.

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.

With respect to the issue of deductibility of the expenses pursuant to subparagraph 20(1)(e)(i) of the Act, there are in effect two tests that have to be met. The first one is that the expenses must be "in the course of an issuance ...of shares of the capital stock of the taxpayer" and in addition, the expenses must meet the test imposed by the preamble to subsection 20(1) which is, "... there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may be regarded as applicable thereto...". As such, the expenses incurred must be wholly applicable to the issuance of the shares and not be only consequential or resulting from the issuance of the shares.

Although there does not have to be a general corporate purpose to meet the criteria in subparagraph 20(1)(e)(i) of the Act, in our view, only the expenses directly related to the issuance of the shares are deductible pursuant to subparagraph 20(1)(e)(i) of the Act. Accordingly, we are of the view that paragraph 20(1)(e) of the Act is not applicable to taxpayers seeking to get an opinion as to whether the terms of a secondary offering are fair to the existing shareholders.

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