4 March 2003 External T.I. 2002-0151485 - INVESTMENT BANNER FEES

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:

Are expenses paid by Targetco to an investment banker incurred in the course of the issuance of the shares?

Position: Generally no .

Reasons: Preamble to Sec. 20 and wording of 20(1)(e) and IT- 341R3. However we would consider section 9 where the statutes require Targetco to incur costs to advise its shareholders.

2002-015148
XXXXXXXXXX C. Tremblay, CMA
957-2139
March 4, 2003

Dear XXXXXXXXXX:

Re: Your Technical Interpretation Request #10 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 public corporation and another corporation (a "target corporation") have entered into a merger agreement. The public corporation will issue shares of its capital stock to the shareholders of the target corporation in exchange for their shares of the target corporation. The target corporation incurs costs relating to the acquisition of its shares by the public corporation including fees paid to investment bankers for advice with respect to the takeover. You have asked whether the amount paid to the investment bankers by the target corporation are deductible under paragraph 20(1)(e) of the Income Tax Act (the "Act").

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. If, however, this situation relates to a factual situation and a completed transaction, 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". In addition to the above test, the expenses must meet the preamble to subsection 20(1) of the Act 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.

In our view, the fees payable to investment bankers by a target corporation are not directly related to the issue of treasury shares of a public corporation but rather the fees paid to the investment bankers are for the benefit of the shareholders of the target corporation. In our view, the reference to "sale" in subparagraph 20(1)(e)(i) of the Act does not contemplate a sale of shares by the shareholders. For example, in the case of a "bought deal", an underwriter initially acquires a new issue of shares of a corporation for the purpose of distributing these shares to the public in return for a commission. The commission expense paid to the underwriter would arguably not be in respect of the issue of shares, thereby necessitating the word "sale" in subparagraph 20(1)(e)(i) of the Act. This interpretation is also supported by the mid-amble between subparagraphs 20(1)(e)(ii.2) and (iii) of the Act.

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, and not precluded by paragraph 18(1)(a) or (b) 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. It is a question of fact whether investment banker fees are incurred as part of a requirement to satisfy the obligations imposed under a Securities Act and /or Business Corporations Act and, in our view a fee for advice provided by an investment banker with respect to the takeover would not satisfy the above requirement.

As clarification to a previous letter to you (2002-015143), it is our view that costs incurred by a purchaser in obtaining a fairness opinion, as part of a merger would not be deductible pursuant to paragraph 18(1)(b) of the Act. The outlay is on account of capital since it is incurred for the purpose of acquiring a capital asset, the shares of a corporation (the target corporation).

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