5 March 2003 External T.I. 2002-0151415 - Information Circular - Purchaser

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: Whether fees incurred by Purchaser to prepare and distribute an information circular relating to a take-over of Target are deductible in computing business income

Position: Generally, no

Reasons: The fees incurred by Purchaser in connection with a take-over will normally be added to the cost of the Target shares acquired by Purchaser

XXXXXXXXXX 2002-015141
Gwen Watson
March 5, 2003

Dear XXXXXXXXXX:

Re: Information Circular - Costs Incurred by Purchaser

This is in reply to your letter of June 28, 2002, wherein you requested our views regarding the tax treatment, under the Income Tax Act (Canada) (the "Act"), of fees incurred to prepare and distribute an information circular.

In your hypothetical scenario, Target and Purchaser are both taxable Canadian corporations and public corporations. Pursuant to a shareholder-approved arrangement under the Canada Business Corporations Act, Purchaser will issue shares of its capital stock to shareholders of Target in exchange for their shares in the capital stock of Target. Purchaser incurs expenses to prepare an information circular to be issued to its shareholders to advise them of the proposed transactions and the implications to them. Specifically, Purchaser pays fees to lawyers, accountants and investment bankers in connection with the preparation of the circular, as well as costs incurred to print and distribute the circular.

You have asked for our views on whether the costs incurred by Purchaser would be deductible in computing income from business on the basis that the fees are incurred to communicate with its shareholders. In your view, this interpretation is supported by The Queen v. Boulangerie St-Augustin Inc., 2002 DTC 6957 (FCA). In particular, you note that the information circular is prepared by Purchaser in compliance with Securities legislation and is circulated in advance of, and with the purpose of, obtaining shareholder approval of certain matters in connection with the proposed acquisition of Target.

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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Our Comments

In Boulangerie, the Court found that expenses incurred by the target corporation to prepare directors' circulars in compliance with the target corporation's obligations under the Quebec Securities Act were properly deductible under subsection 9(1), and were not precluded by paragraphs 18(1)(a) or (b). In our view, these findings are only applicable in the case of such expenses incurred by a target corporation. In the context of your hypothetical scenario, the Canada Customs and Revenue Agency (the "CCRA") would normally regard the expenses incurred by Purchaser, as detailed above, as relating to the acquisition of the Target shares, or capital property, with the result that the amount of the fees should be added to the cost to Purchaser of the Target shares (see paragraphs 14 and 16 of Interpretation Bulletin IT-99R5 Legal and Accounting Fees, consolidated in December 2000).

In the case of an aborted take-over, the fees incurred by Purchaser may qualify as an eligible capital expenditure if the requirements of that definition in subsection 14(5) are satisfied.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R5, and are not binding on the CCRA.

Yours truly,

Mark Symes
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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