25 November 1992 Income Tax Severed Letter 9228750 - Whether Discounts Deductible as Financing Expenses

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

1992 Canadian Tax Foundation Conference

Author: R. McMechan November 25, 1992

       Deductibility of a Discount as a Financing Expense
                         Question 2

Expenses that are deductible pursuant to paragraph 20(1)(e) of the Act include a commission, fee or other amount paid or payable for or on account of services rendered by a person as a salesman, agent or dealer in securities in the course of the issuance or sale of shares.

In IT-341R2 , dated October 31, 1990, Revenue Canada states that a discount is not deductible under paragraph 20(1)(e) of the Act. It also states, however, that where a person acting as a principal is an underwriter in the transaction and there is clear evidence that the acquisition of shares, units, interests or debt obligations by the underwriter was for the purpose of making a public distribution thereof, any underwriting fees paid or payable for the services to be performed by the underwriter which are clearly costs associated with the issuance or sale are deductible under paragraph 20(1)(e) to the extent reasonable in the circumstances. The reference to "paid or payable" in paragraph 20(1)(e) would seem to exclude an underwriting discount in a "bought" deal where the underwriter might be said to be acting as principal rather than as agent. Based on the Royal Trust case, reported at (1983) C.T.C. 159 (F.C.A.), it appears that it is now accepted that if there is a crossing of cheques (i.e., the shares are not issued at a discount to the underwriter; instead they are issued at the price intended for the public with a cheque issued to the underwriter to cover the fee) it will be accepted that a fee has been paid and will be eligible for 20(1)(e) treatment.

Does Revenue Canada insist that the arrangement with the underwriter be structured in this manner to ensure deduction of the underwriter's compensation under paragraph 20(1)(e)?

                       Answer 2

When a corporation sells shares of its capital stock at a discount, the discount is not an expense incurred in the course of selling shares that is deductible under paragraph 20(1)(e) or under any other provision of the Act - see para. 15 of IT-341R2 . The Royal Trust decision, which dealt with the characterization of an amount paid to an underwriter, did not alter the principle that a discount on the sale price of shares is not deductible as an expense. Accordingly, in order for an expense to be deductible under paragraph 20(1)(e) of the Act, it must be separately identified as an amount paid or payable for the underwriter's services. The facts of the arrangement must also be examined, however, to ensure that the amount is not in substance a non-deductible discount.