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 Issues: Are commissions paid to an Investment Banker for the acquisitions of targetco deductible under 20(1)(bb)?
Position: no
Reasons: Commissions are not deductible under 20(1)(bb) - Position of Paragraph 4 of IT-238R2 only applies for the purposes of 20(1)(bb)(ii)
June 3, 2004
HEADQUARTERS HEADQUARTERS
Technical Applications and C. Tremblay, CMA
Valuations Section 957-2139
Attention: Rob Ferrari
2004-007302
Paragraph 4 of Interpretation Bulletin, IT-238R2 (the "Bulletin")
Commissions as contemplated under paragraph 20(1)(bb) of the Income Tax Act (the "Act")
This is in reply to your memorandum of April 23, 2004, regarding the comments in paragraph 4 of the Bulletin and whether the term "commissions" was meant only to apply for the purposes of subparagraph 20(1)(bb)(ii) of the Act and is not intended to apply for the purposes of subparagraph 20(1)(bb)(i) of the Act.
Our understanding of the relevant facts, based on the limited information available, is as follows:
The corporate taxpayer engaged the services of an investment bank to act as financial advisor and exclusive agent for the possible acquisition of two target corporations. The acquisition was successful and the corporation deducted the fees paid "for advise as to the advisability of purchasing the shares" of the target corporation under subparagraph 20(1)(bb)(i) of the Act. In its engagement letter with the advisor, the fees were calculated as follows:
Acquisition 1:
Fees:
i) a work fee of $ XXX per month of four months...whether or not the acquisition is completed, which fee shall be credited against any fee payable under (ii)
ii) a commission of .65% of the Total Transaction Value, up to a maximum of $XXX.
Acquisition 2:
In consideration of acting as exclusive agent and financial advisor, a success fee, based on the amount of debt assumed and the value of any business unit or assets transferred, as applicable to be calculated as 1% of the Transaction Costs, provided however, that the minimum success fee payable shall be $XXX and the maximum should be $XXX.
The Bulletin explains when a deduction under paragraph 20(1)(bb) of the Act is allowed to a taxpayer for fees paid, other than commissions, for advice on buying or selling a specific share or security by the taxpayer or for the administration or the management of the shares or securities of the taxpayer. The fees must be paid to a person whose principal business is advising others whether to buy or sell specific shares or whose principal business includes the administration or management of shares or securities. Paragraph 4 goes on to state that fees that are not commissions but that otherwise meet the requirements of paragraph 20(1)(bb) of the Act are not disallowed solely by reason of the fact that they are determined or computed with reference to the fair market value of the portfolio at a particular time. Paragraph 4 of the Bulletin enumerates services that are in the nature of management and administrative functions and based on our research of the back-up files of the Bulletin, in our view, the words of paragraph 4 refer solely to subparagraph 20(1)(bb)(ii) of the Act.
The preamble of paragraph 20(1)(bb) of the Act specifically excludes amounts paid as commissions. Accordingly, in our opinion, a transaction fee not expressly for services in respect of the administration or management of shares or securities of the taxpayer would not be deductible under paragraph 20(1)(bb) of the Act.
Generally, commissions relating to the purchase of investments are capital expenses and are added to the adjusted cost base of the units or shares purchased. In the case at hand, the outlay is on account of capital since it is incurred for the purpose of acquiring a capital asset, the shares of a corporation (the target corporation).
We trust the above comments will be of assistance
Steve Tevlin
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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