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.
Tax Executives Institute
Question 4
In a financial difficulty restructuring including the issuance of term preferred shares ("distress preferred shares"), significant costs are incurred with respect to issuing the shares. The issuer of the distress preferred shares" is usually a single purpose subsidiary of the debtor which has no ability to benefit from a deduction of such costs.
If instead of providing funds to the subsidiary to pay such costs the parent paid the costs itself, would the amounts be deductible to the parent under 20(1)(e)(ii) of the Act if:
a) the funds raised by issuance of the shares by the subsidiary are used to acquire the parent's debt from the creditor, or
b) the funds raised by issuance of the shares by the subsidiary are used to pay down the debt due to the creditor.
Answer
Only the corporation issuing the shares is entitled to a deduction for the costs of issuing shares. However, in the above example, if the parent agrees to incur the issuing costs directly as part of an agreement to borrow money from the subsidiary, the parent would be entitled to a deduction under subparagraph 20(1)(e)(ii), provided the requirements of this provision are otherwise satisfied.
In circumstances where the subsidiary acquires the parent's debt from the creditor, and, as part of the restructuring, the terms of the debt are modified (e.g. interest is suspended), the parent will be entitled to a deduction under proposed 20(1)(e)(ii.2) for the costs, if incurred directly as part of the agreement to revise the terms of the loan.
We have also seen situations where the subsidiary has either charged the parent interest or a borrowing fee in respect of the inter-company loan of the share proceeds from the subsidiary to the parent. This creates enough income in the subsidiary to offset the costs and gives the parent the deduction. We have ruled favourably where the inter- company charge was reasonable in the circumstances.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1993
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1993
Email this Content