28 September 1990 Income Tax Severed Letter ACC9731 - Debt Rescheduling Costs

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.

September 28, 1990
                                         Leasing and Financing    
Special Audits Division                    Section
E.N. Gauthier, Director                  J. Stalker
                                         957-9796
Attention:  B. Chisholm
Specialized Industries Sections
                                         7-901457
24(1)
SUBJECT:
           Debt Rescheduling Costs

We are writing in response to Mr. fitzgerald's memoranda dated June
25, 1990 in which he requested our opinion:
                                         24(1)

Facts

Our understanding of the facts is as follows:                     
              24(1)
                              24(1)

                              24(1)
Your opinion

You agree with the position of the Calgary District Office.

Our opinion

Treatment under GAAP                          24(1)  
                            24(1)

    b)    The decision in Metropolitan Properties (supra) has, in 
          our view, been misconstrued by the taxpayer's         
          representatives as justification for paralleling tax    
          treatment with GAAP treatment.  In his concluding remarks 
          (items 1 and 2 at page 5137) Walsh, J. stated that a    
          taxpayer should normally apply GAAP in determining his  
          profit unless a section of the Act requires a departure 
          from GAAP.  We believe the Act requires a departure from 
          GAAP in this situation since paragraph 18(1)(b)         
          specifically precludes the deduction of capital         
          expenditures.

Capital Treatment

                                  24(1)

However, as noted by Mr. Justice Abbott in British Columbia Electric Railway Co. ltd. v. MNR 58 DTC 1022 at p. 1027 in his comments on the predecessor to paragraph 18(1)(a): Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made "for the purpose of gaining or producing income" comes within the terms of s. 12(1)(a) whether it be classified as an income expense or as a capital outlay.

Once it is determined that a particular expenditure is one made for
the purpose of gaining or producing income, in order to compute
income tax liability it must next be ascertained whether such
disbursement is an income expense or a capital outlay.   This
statement was cited with approval by Mr. Justice Cattenach in
deciding Riviera Hotel Co. Ltd. v. MNR 72 DCT 6142                
                24(1)         in determining that a premium paid to
discharge a mortgage was on capital account, Mr. Justice Cattanach
reviewed the authorities supporting the principle that the cost of
financing a business is a capital expense (See page 6144).  Again,
in The Queen v. HerBan Capital Corporation Limited 
89 DTC 5404 at
page 5411 the Chief Justice emphasized that paragraph 18(1)(a)
does not authorize the right to deduct an amount.

Indirectly addressing the test of paragraph 18(1)(b),             
                   24(1) Mr. Justice Joyal reviews the principles
in the case     19(1) cited as support for income treatment (noted
above) and other leading cases in Kaiser Petroleum Ltd. v. The
Queen (supra) starting on page 6037.  As he states on that page:  
The genesis of these cases may aptly be summarized in the         
dictum of Lord Pearce in B.P. Australia Ltd. v. Commissioner of   
Taxation of the Commonwealth of Australia (1966) A.C. 227, found at
page 264:

          The solution to this problem is not to be found by any  
          rigid test or description.  It has to be derived from
          many aspects of the whole set of circumstances some of
          which may point in one direction, some in the other.  One 
          consideration may point so clearly that it dominates
          other and vaguer indications in the contrary direction. 
          It is a commonsense appreciation of all the guiding
          features which must provide the ultimate answer.

Mr. Justice Urey further illustrates this' view in The Queen v. Jager Homes Ltd. et al 88 DTC 6119 at 6121 by quoting Van Den Ber Bergs, Limited v. Clark (1935) A.C. 431:

          Consequently it is to the decided cases that one must go 
          in search of light.  While each case is found to turn
          upon its own facts, and no infallible criterion emerges, 
          nevertheless the decisions are useful as illustrations
          and as affording indications of the kind of
          considerations which may relevantly be borne in mind in
          approaching the problem.

Using this approach                               24(1)           

                              24(1)

Deductibility under paragraph 20(1)(e)

                          24(1)

The test in Yonge-Eglinton Building Ltd. v MNR (supra), is that the
expenses are incurred "... in connection with..." or "...
incidental to..." the borrowing.
                              24(1)
As emphasized by the preamble to subsection 20(1) there must be a
clear connection between the amount to be deducted and the source
of the borrowing. 

                            24(1)

We also note     19(1)   quotation of a passage from the same case
which indicates that paragraph 20(1)(e) has a very broad scope
because the section specifically excludes commissions and bonuses
and payments as or on account of principal and interest.  In the
years under audit the phrase "a commission or bonus paid or payable
to a person ... from whom the money was borrowed..." had been
removed from the law.  Although a minor point, we do not believe  
          19(1)    reliance on this passage is warranted when the
wording in question has changed.  Deductibility as a discount
                                     24(1)

Expenses related Co financial reporting

In our opinion, expenditures, if any, incurred to issue financial reports to shareholders to inform them of the loan restructuring should be deductible under subparagraph 20(1)(g)(iii), including the cost of obtaining the necessary legal and financial advice in connection with the issuance of financial reports. Summary

Based on our understanding of the facts as set out above, we agree with you that the majority of the fees fall within the definition of an eligible capital expenditure in paragraph 14(5)(b) and that accordingly a deduction may be claimed under paragraph 20(1)(b) of the Act. As noted above, any financial reporting expenses would be deductible under paragraph 20(1)(g).

Director Financial Industries Division Rulings Directorate