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.
Can a Guarantee fee be deductible under 20(1)(e)?
REASON FOR POSITION:
Words of 20(1)(e)(ii) and IT 141R3
XXXXXXXXXX C. Tremblay, CMA
March 4, 2003
Re: Loan Guarantee
This is in reply to your letter of November 21, 2002 wherein you request our interpretation of the application of subsection 18(9.1) of the Income Tax Act (the "Act"), paragraph 20(1)(e) of the Act and paragraph 20(1)(e.1) of the Act in the following hypothetical circumstances.
A borrows funds on a long-term basis from an arm' s length Lender at commercial rates of interest negotiated on the assumption that A's indebtedness to the Lender will be guaranteed for the life of the loan by a Guarantor dealing at arm' s length with A and the Lender and that the loan will be secured by a mortgage on A's assets.
A pays a one-time guarantee fee at the time of financial closing to the Guarantor under terms, which, in the event of a default by A on its indebtedness to the Lender, require the Guarantor to repay the loan.
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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (TSO). However, we are prepared to provide the following general comments.
We agree that subsection 18(9.1) of the Act does not have application to deem the guarantee fee to be interest. We also agree that paragraph 20(1)(e.1) of the Act does not have application because the guarantee fee is paid in respect of the term of the loan rather than with respect to the year in which it is paid.
Paragraph 17(d) of Interpretation Bulletin IT 341R3 confirms that an amount paid to the guarantor of a loan either on a periodic basis during the continuance of the loan, or as a one time-payment at the commencement of the loan incurred in the course of borrowing money and not otherwise deductible is deductible under subparagraph 20(1)(e)(ii) of the Act.
In our view, a guarantee fee paid by a borrower to a person dealing at arms length to both the borrower and the lender and required by the lender, would generally be an expense incurred in the course of borrowing money. Accordingly, provided a guarantee fee is incurred in the course of borrowing money used to earn income from a business or property and that it is reasonable, we are of the view that a guarantee fee is deductible in accordance with the provisions of paragraph 20(1)(e) of the Act.
We trust the above comments are of assistance.
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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