30 April 1990 Income Tax Severed Letter AC74728 - Deduction of Rescheduling Fee 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.

April 30, 1990

      Audit Programs Directorate        Financial Industries
      Audit Applications Division         Division
      K.R. Warren                       Peter Lee
      Director                          957-2745

Attention: Ian J.D. Rathwell

                                         7-4728

SUBJECT: 24(1)

This is in reply to your memorandum of February 15, 1990 wherein you requested our opinion regarding

                                 24(1)

Facts

Our understanding of the facts is as follows:

1.

                        24(1)
2.

               24(1)

3.

4.

             24(1)

Issues

5. The issues on which you have requested our opinions are:

(a)

           24(1)                                      

(b) District Office Opinion

6. The Calgary District Office is of the opinion that the Rescheduling Fee is neither deductible under paragraph 20(1) (e) of the Act not under any other provisions of the Act.

Taxpayer's Opinion

7. The taxpayer's representative                                 
                 24(1)

                  Therefore, in his opinion the Rescheduling Fee is
deductible under paragraph 20(1) (e) of the Act as the fee was
incurred in the course of borrowing money.  His alternative
argument is that the Rescheduling Fee will be deductible under
paragraph 20(1) (f) of the Act in subsequent years in accordance
with the comments in paragraph 5 of Interpretation Bulletin
IT-341R
.

Your Opinion

8. In your opinion the portion of the Rescheduling Fee that can reasonably be considered to relate to the Credit Facility is deductible under paragraph 20(1)(e) of the Act. You believe that 19(1) argument that the "prepaid interest" is not prepaid interest but additional debt assumed by 24(1) is correct.

Our Opinion

9.  We agree with your opinion that the portion of the Rescheduling
Fee that may reasonably be considered to relate to the Credit
Facility is deductible under paragraph 20(1) (e) of the Act.  In
our opinion however the portion of the Rescheduling Fee that can
reasonably be considered                          24(1)
                         24(1) 
           In our opinion paragraph 20(1)(f) of the Act is not
applicable to the Debenture Fee but it may be considered an
eligible capital expenditure within its meaning under paragraph
14(5)(b) of the Act and accordingly a deduction may be claimed
under paragraph 20(1)(b) of the Act.  Our rationale is explained in
the following paragraphs.

10. Under common law principles, payment involves the performance of an obligation, and not merely its discharge. Performance requires that the debtor actually parts with something, other than his promise to pay in the future, such as cash, a non-postdated cheque, or other goods and services. Where a debtor gives a security or other evidence of indebtedness to a creditor, he has not parted with anything even if the instrument is accepted in absolute satisfaction of the original debt. Lord Greene stated in Cross v. London and Provincial Trust Limited, (1938) 1 All ER 428 (CA), at page 433: "The tree has produced no fruit ... The owner of the tree has refuse to allow it to be picked, and has merely given a voucher entitling the holder to pick it at a future date." In that case, an interest-bearing bond was issued in place of interest on a loan.

The court decided that there was no interest payment until the bond
was paid through redemption or cancellation.  We cannot distinguish
the case at hand    from the Cross case and accordingly,   24(1)
                       24(1)

11.                    24(1)
                                             we considered the
comments of Estey, J., in Stock Exchange Building Corporation Ltd.
v. M.N.R., 
55 DTC 1014 (SCC), wherein he stated (page 1016):

"There is, with respect to the principal sum of $550,000.00, the relationship of lender and borrower, but, as to the interest, it is difficult to find any other relationship than that of debtor and creditor, particularly as the language in the Indentured goes no further than to say `and interest on overdue interest at the said rate.' In the circumstances, there is not here present that relationship of lender and borrower, see M.N.R. v. T.E. McCool Ltd.. 1950 S.C.R. 80 ( 49 DTC 700)."

Similarly in the case at hand a relationship of lender and borrower
did not exist between                       24(1)              A
fee is deductible under subparagraph  20(1)(e)(ii) of the Act only
if it is incurred in the course of borrowing money.  See Riviera
Hotel Co. Ltd. v. M.N.R., 
72 DTC 6142 (FCTD), and Neonex
International Ltd. v. Her Majesty the queen, 
78 DTC 6339 (FCA).  In the case at hand                           24(1)

12. In order to be deductible under paragraph 20(1) (f) of the Act,
the   24(1)       must represent "... an amount paid in the year in
satisfaction of the principal amount...".  Principal amount is
defined in subsection 248(1)    of the Act and reads in part as
follows:  "... the maximum amount payable ... on account of the
obligation by the issuer thereof, otherwise than as or on account
of interest ...".  In the case at hand                            
                 24(1)

Hence, there is no principal amount for the purposes of paragraph
20(1)(f) of the Act.  Furthermore, even assuming that there were a
principal amount, the    comments in paragraph 5 of Interpretation
Bulletin 
IT-341R
 would not be relevant as it cannot be said that
the        24(1) 

Accordingly paragraph 20(1)(f) of the Act is not applicable.

13. In our opinion,      24(1)         falls within the definition
of an eligible capital expenditure under paragraph 14(5)(b) and is
not specifically excluded under any of subparagraphs 14(5)(b)(i) to
(vi). Accordingly, a deduction may be claimed under paragraph
20(1)(b) of the Act.

We hope our opinions are helpful to you.

Director Financial Industries Division Rulings Directorate