5 July 2004 External T.I. 2004-0079711E5 - Fees paid to earn higher interest rate

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.

Principal Issues: Whether fees paid to earn a higher rate of interest are deductible

Position: Must determine whether fee is paid on account of income or capital; if the investment is for several years, will generally be on capital account

Reasons: Question of fact whether enduring benefit; 20(1)(bb) does not apply

XXXXXXXXXX 						2004-007971
		Denise Dalphy, LL.B.
(613) 941-1722
July 5, 2004

Dear XXXXXXXXXX:

We are writing in reply to your letter dated May 26, 2004 wherein you requested our views on the deductibility of a fee paid by taxpayers in order to earn higher interest rates.

Our understanding of the facts is as follows:

An insurance company offers two related term deposit products. Product A provides for a particular rate of interest to be paid to the investor. Product B provides for that same rate of interest plus an additional 1% interest, however there are much higher minimum deposit requirements and the investor must pay a one-time fee of $200 at the time when the investment is made.

Our Comments

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are seriously proposed in the near future and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Notwithstanding the foregoing, we are providing the following general comments.

Although it is always a question of fact, where an amount is paid in order to earn an income stream for several years, such expense will generally be considered on account of capital, not income. You may wish to refer to paragraphs 10 to 13 of Interpretation Bulletin IT-479R, Transactions in Securities, wherein the tests that the Courts have applied in making such determinations are described.

Paragraph 20(1)(bb) of the Income Tax Act (the "Act"), which permits deductions for certain investment counsel fees will not apply because its ambit is restricted to shares and securities. Further, there is no provision in the Act that would permit such a deduction, unless the fee is on income account. Where the fee is paid on capital account, the fee would be added to the cost of the investment property of the taxpayer, with the result that on the disposition of the debt obligation a capital loss (or gain) might result.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate

c.c.: Ms Karen Brodmann
A/Director General
Legislative Policy Directorate