2 December 2003 External T.I. 2003-0048565 - PREMIUMS PAID

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.

PRINCIPAL ISSUE:

(i) Whether premiums paid on an inter-company borrowing in a particular situation are deductible?

(ii) Whether a premium received on a debt re-opening would be considered to fall in the category of premium received where debt is not deliberately priced to achieve this result as described in paragraph 40 of IT-533?

Position:

(i) No.

(ii) Perhaps.

REASON:

(i) The premium is simply part of the cost of acquiring a debt instrument and is not a separate amount that may be deducted by the payor.

(ii) We would need to become more familiar with this practice and would be curious to know how many debt issues are re-opened when this would result in a discount.

TEI - Liaison - December 2003 - # 2003-004856 (Question # 13)

#13

Question:

Where borrowed money constitutes stock in trade to the debt issuer, the premium amount received by the issuer will be included in income under section 9.

(a) Assume that the borrowed money represents stock-in-trade to the issuer and that the issuer lends the money borrowed to a wholly owned subsidiary on the same terms and conditions as the external borrowing. Is the premium paid by the parent company to the subsidiary company deductible in the year paid under section 9?

(b) If the borrowed funds do not represent stock-in-trade to the parent company, is the premium deductible and, if so, when is it deductible?

Corporations will at times issue a debt series that provides for a "reopening" of the series in order to permit additional borrowings to be made under the terms and conditions of that series.

(c) Please confirm that any premium received in connection with a reopening issue will not be considered to arise because the issue was "deliberately priced" to generate a premium.

Answer:

The interpretation bulletin on Interest deductibility IT-533 was only very recently released. The views expressed by CCRA on the deductibility of interest in certain circumstances described in IT-533 are of a general nature and are intended to provide, initially, a general framework. It is anticipated that as we move forward in time and apply these views to various factual situations, our positions will evolve and ultimately result in a more comprehensive set of guidelines.

In formulating our general views on premiums arising on the issuance of debt obligations discussed in paragraph 40 of IT-533 we did not consider the treatment of premiums paid on an inter-company borrowing in the manner described in this question nor did we address the issue of "re-opened debts.

However, we can provide the following general comments.

A binding reply would require a comprehensive review of the facts of the situation.

With regard to (a) and (b) involving premiums paid, it is our initial view that such amounts are simply part of the cost of acquiring a debt instrument and are not separate amounts that may be deducted by the payor.

With respect to (c), a premium received on a debt re-opening could be considered in the category of a premium received where debt is not deliberately priced to achieve this result. However, we would need to become more familiar with this practice and would be curious to know how many debt issues are re-opened when this would result in a discount.

TEI Liaison Meeting
Prepared by: Philip Diguer
December 02, 2003