1 March 2001 External T.I. 2001-0068715 - Expenses incurred aborted debt offering

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Agency's views on the deductibility of expenses incurred by a taxpayer with respect to an aborted debt offering where there is no substituted transaction.

Position TAKEN:

Not deductible under 20(1)(e) however, they may qualify as eligible capital expenditures.

Reasons FOR POSITION TAKEN:

The CCRA generally looks to the purpose for which the taxpayer had intended to borrow the funds in order to characterize the costs associated with an abandoned plan to issue debt.

Paragraph 18(1)(a) imposes a general limitation on the deductibility of an expense to one that is incurred for the purposes of gaining or producing income from property or business. Paragraph 18(1)(b) however, imposes an additional limitation on the deductibility of expenses incurred for a purpose described in paragraph 18(1)(a) but are on account of capital (as in the case in hand).

Paragraph 20(1)(e) applies to permit the deduction of a financing expense where, inter alia, it is incurred in the course of a borrowing of money. Since in the present case a borrowing did not occur, any expenses incurred in connection with the aborted attempt at borrowing are ineligible for a deduction under this provision. The Agency does however permit, as an administrative practice, a deduction in certain circumstances as described in paragraph 12 of IT-341R3. However this administrative concession does not apply to the case at hand since the taxpayer did not subsequently borrow an amount under "a plan that was substituted for the original one".

However, provided the expenses were incurred in reference to a plan to borrow funds where funds would have been used for the purpose of gaining or producing income from business it would appear that they may qualify as eligible capital expenditures under the definition set out in subsection 14(5).

XXXXXXXXXX 2001-006871
P. Diguer, CGA
March 1, 2001

Dear XXXXXXXXXX:

Re: Costs associated with an abandoned debt issue

This is in reply to your letter dated January 30, 2001 in which you request the Canada Customs & Revenue Agency's (the "CCRA") views on the deductibility of expenses incurred by a taxpayer with respect to an aborted debt offering.

Specifically, in your letter you describe a situation where a corporation attempts to raise money through the issuance of debt. The loan proceeds are to be used by the corporation to finance its business activities. The corporation incurs various legal and accounting costs with respect to the attempt (the "Expenses") however, ultimately, the loan transaction is not carried out.

YOUR VIEWS

Briefly, you indicate that the Expenses would generally be deductible under paragraph 20(1)(e) of the Income Tax Act (Canada) (the "Act") provided that the taxpayer actually carries out the debt offering. However, paragraph 12 of Interpretation Bulletin 341R3 ("IT-341R3") confirms the CCRA view that, in order to obtain the deduction under paragraph 20(1)(e) of the Act, the company must actually carry out the transaction for which the costs were incurred.

You also considered other provisions of the Act, including paragraphs 18(1)(a) and 18(1)(b), which may apply to deny the deduction of the Expenses and concluded that the Expenses would not be deductible.

In particular you ask what is the correct income tax treatment for these expenses?

OUR COMMENTS

Where a taxpayer incurs legal and accounting expenses in reference to an abandoned attempt to issue debt, in order to characterize the expenditures for purposes of the Act, the CCRA would generally look to the purpose for which the taxpayer had intended to borrow the money.

Since in this case, the taxpayer had intended to use the borrowed money for the purpose of gaining or producing income from business, the Expenses would not be denied a deduction under paragraph 18(1)(a) of the Act. However, assuming that the borrowed money would not have been the taxpayer's stock-in-trade (i.e., as would be the case if the taxpayer were not a money lender), the borrowings would have been on account of capital. Accordingly, the Expenses would be considered to be on account of capital and a deduction thereof would be denied pursuant to paragraph 18(1)(b) of the Act.

We agree with your conclusion that the Expenses do not meet the requirements for a deduction under paragraph 20(1)(e) of the Act. However, having concluded that the Expenses are on account of capital and are incurred for the purpose of gaining or producing income from a business, it would appear that they would generally qualify as eligible capital expenditures under the definition set out in subsection 14(5) of the Act.

Expenses that are on account of capital and are incurred for the purpose of gaining or producing income from property would not however qualify as they do not meet all the conditions set out in subsection 14(5) of the Act, in particular, the requirement that they be incurred for the purpose of gaining or producing income from a business.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch