7 April 1998 External T.I. 9731655 - FINANCING FEES DEDUCT. 2ND BID?

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.

Principal Issues:

1. Meaning of the expression "expense incurred in the year or a preceding taxation year... in the course of a borrowing of money" as set out in subparagraph 20(1)(e)(ii).

2. Would the expenses incurred in connection with an unsuccessful bid to obtain a loan be deductible, by virtue of subparagraph 20(1)(e)(ii) where a second attempt at obtaining a loan with another creditor is successful.

Position TAKEN:

1. Generally a question of fact.

2. Yes.

Reasons FOR POSITION TAKEN:

1. The case law suggests (see below) that the words "in the course of" as they appear in paragraph 20(1)(e), are used in the sense of "in connection with" or "incidental to" or "arising from" and refer to the process of carrying out or the things which must be undertaken to carry out the issuing or selling or borrowing or in connection with which the expenses are incurred. This view was initially set out by the Federal Court of Appeal in MNR v. Yonge-Eglinton Building Ltd., (1974) and as recently stated (1996) by Justice Bonner in Sherway Centre Limited v. MNR,..."In my view this decision (Yonge-Eglinton) governs." They are however to be restrictively interpreted such that there must be an actual borrowing (see Les Laiteries Leclerc Inc. v. MNR) .

2. Paragraph 12 of IT-341R3 states that the rule with respect to both equity and debt (see Les Laiteries Leclerc Inc) is that no deduction will be allowed pursuant to paragraph 20(1)(e) where the money is never in fact borrowed. However, the exception (the “Exception”) to this rule (see paragraph 12 of IT-341R3) (see BACM Industries Limited v. MNR ) applies in circumstances where a plan for a transaction involving a borrowing of money used for the purpose of earning income from a business was abandoned but that the transaction is actually carried out pursuant to a new transaction plan that was substituted for the original one. It would appear that the present case could qualify as an Exception such that the amount could be deductible pursuant to 20(1)(e)(ii).

		5-973165
XXXXXXXXXX 	P. Diguer
(613) 957-8953

Attention: XXXXXXXXXX  

April 7, 1998

Dear Sirs:

Re: Subparagraph 20(1)(e)(ii) of the Income Tax Act (Canada)

This is in reply to your letter dated December 1, 1997 in which you requested our opinion concerning the situation where a Canadian resident (the "Taxpayer") engages in negotiations with a lender (the "First Lender") to borrow money to be used by the taxpayer for the purpose of earning income from a business. In negotiating with the First Lender the Taxpayer incurs expenses but is unable to obtain a loan. The Taxpayer then enters into negotiations with another lender (the "Second Lender") to borrow money to be used by the Taxpayer for the purpose of earning income from a business. The Taxpayer is successful in negotiating a loan from the Second Lender and you question whether the expenses incurred with respect to the First Lender would be deductible under paragraph 20(1)(e) of the Act.

The situation outlined in your letter appears to relate to a specific taxpayer and may involve completed transactions. As explained in Information Circular 70-6R3 dated December 30, 1996 ("IC 70-6R3"), responsibility for the determination of the income tax implications of completed transactions rests with the relevant district tax services office. Nevertheless, we can offer the following general comments.

The Department’s views in connection with the above was provided at the 1987 Canadian Tax Foundation Round Table.

Q. 50 Deductibility of Commitment Fees

Assume that a taxpayer has paid commitment fees to a financial institution with respect to a proposed loan to be used to acquire an income-producing investment. If the taxpayer subsequently borrowed the money from a different financial institution, would the commitment fee paid to the first institution be deductible pursuant to paragraph 20(1)(e) of the Act?

The Department’s response was as follows.

The Department would consider the commitment fee to be an expense incurred in the course of borrowing money within the meaning of subparagraph 20(1)(e)(ii) if the taxpayer used the borrowed money to acquire the income-producing investment. In other words, the actual financing must be a substitute for the loan originally sought. This is consistent with the comments in paragraph 12 of Interpretation Bulletin IT-341R3.

The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in IC 70-6R3 they are not binding on Revenue Canada, Customs, Excise and Taxation.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch