CRA rules that interest on borrowed money used to pay a premium on the cash redemption of convertible debentures is deductible

A Canadian public company (ACo ) will force the conversion of its outstanding convertible debentures, by issuing a notice to redeem them for their principal amount. However, upon receiving notice that the debentureholders are converting, it will then exercise a further right to redeem such debentures in cash for their value based on the market value of the underlying shares, thereby resulting in the payment by it of a substantial cash redemption premium. The redemption will be funded with borrowed money.

CRA applied the “fill the hole” concept to rule that the interest on the borrowed money used to pay the premium will be deductible under s. 20(1)(c)(i) given that the accumulated profits of ACo at the time of the redemption will exceed the premium. More routinely, it also ruled that the borrowed money used to repay the debentures’ principal will be deductible in light of s. 20(3).

Neal Armstrong. Summaries of 2018 Ruling 2018-0740931R3 F under s. 20(1)(c)(i) and s. 20(3).