4 March 2003 External T.I. 2002-0150835 - PURPOSE WHOLLY APPLICABLE

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 to an investment banker as part of an issuance of shares to the shareholders of Targetco incurred in the course of the issuance of the shares?

Position: Generally NO, .

Reasons: Preamble to 20 and Wording of 20(1)(e) and IT- 341R3.

2002-015083
XXXXXXXXXX C. Tremblay, CMA
957-2139
March 4, 2003

Dear XXXXXXXXXX:

Re: Your Technical Interpretation Request #1 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 pursuant to a shareholder approved "arrangement" under the provisions of the Canada Business Corporations Act, a public corporation will issue shares of its capital stock to the shareholders of a target corporation in exchange for their shares of the capital stock of the target corporation. The public corporation will incur expenses in the course of issuing its shares including fees payable to investment bankers relating to the issuance of the shares.

In your view, paragraph 20(1)(e) of the Income Tax Act (the "Act") provides a deduction for expenses incurred in the course of an issuance of shares of the capital stock of the taxpayer and a taxpayer is only required to incur an expense in the course of an issuance of shares. Paragraph 20(1)(e) of the Act does not contain a "purpose test".

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. However, we are prepared to provide the following comments.

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 the second test, the expenses must meet the preamble to subsection 20(1) 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.

It is a question of fact whether fees payable to investment bankers are wholly applicable to the issue of shares of the capital stock of a corporation. Generally, investment bankers recommend and execute strategies for takeovers and mergers of corporations and accordingly, the fees would not, in our view, be wholly applicable to the issuance of shares for purposes of subparagraph 20(1)(e)(i) of the Act.

The CCRA generally takes the view that costs incurred by the Purchaser in the course of a take-over will be capital expenditures that should be added to the cost of the shares so acquired.

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