CRA finds that the substituted-debt exclusion did not deny s. 18(9.1) deductibility of a redemption premium where the new debt was to new investors

A public company issued Series A Debentures (“SAD”), and subsequently issued Series B Debentures (“SBD”), and redeemed the SAD together with an early redemption premium. Whether it was entitled to deduct the redemption premium under s. 18(9.1) turned on whether (as per s. 18(9.1(a)) it could reasonably be considered to have paid the premium “in respect of the substitution” of the SAB for the SAD. In finding that this was not the case, the Directorate stated:

[S]ince the SAD Investors are a substantially different group of investors than the SBD Investors … it could not reasonably be considered that the SAD Investors were paid the Redemption Premium “in respect of the substitution of the [SAD]” since it was the SBD Investors, and not the SAD Investors, who provided a substitute debt for the SAD.

This upshot appears to be that the “substitution” exclusion in s. 18(9.1)(a) will not apply to an early redemption premium where the replacement debt is issued to a different group of investors.

Neal Armstrong. Summary of 29 May 2017 Internal T.I. 2017-0689161I7 under s. 18(9.1)(a).