7 October 2011 Roundtable, 2011-0412021C6 F - Financing Expenses

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20(1)(e)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: Whether financing expense deductible under paragraph 20(1)(e)?

Position: No position taken.

Reasons: Not enough facts.

FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011

Question 3

Deductibility of borrowing costs

Background

A group of corporations restructured its financing. Corporation A, Corporation B and Corporation C held an interest in the ABC Partnership. As part of the restructuring of the financing of the group, Corporation A borrowed from a financial institution and was required to pay borrowing costs. Corporation A used the borrowed money to make a capital contribution to the ABC Partnership, which used that sum to repay a debt to another financial institution. That debt was incurred by the ABC Partnership to earn income from a business. Corporation A on-charged the financing expenses to the ABC Partnership.

Subparagraph 20(1)(e)(ii.2) permits inter alia the deduction over five years of financing expenses incurred in the course of the restructuring of a debt or its assumption by the taxpayer, provided that the other conditions are satisfied.

Questions

A) Pursuant to subparagraph 20(1)(e)(ii.2), can the ABC Partnership deduct over five years the financing expenses charged to it by Corporation A?

B) Can Corporation A fully deduct the re-invoiced expenses from the income from that re-invoicing, so that there is a nil effect on its taxable income?

CRA Response

The facts available are insufficient and do not allow the CRA to determine what the appropriate tax treatment would be in the situation described above.

It is possible that the transactions do not constitute a restructuring of ABC Partnership's debt, so that subparagraph 20(1)(e)(ii.2) would not be applicable. In addition, it would be necessary to consider whether the fees charged by Corporation A truly constitute an expense of the ABC Partnership and whether they were reasonable in the circumstances.

Depending on the facts, it is possible that paragraph 20(1)(e) is applicable in respect of financing expenses incurred by Corporation A. However, financing expenses would not be deductible under paragraph 20(1)(e) if the amount received by Corporation A from ABC Partnership would but for subsection 12(2.2) be included in computing Corporation A's income, and Corporation A made an election under subsection 12(2.2) respecting the financing expenses.

Robert Gagnon
(613) 957-9768
2011-041202

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Text of Severed Letter

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.

Principales Questions: Whether financing expense deductible under paragraph 20(1)(e)?

Position Adoptée: No position taken.

Raisons: Not enough facts.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE DU 7 OCTOBRE 2011
APFF - CONGRÈS 2011

Question 3

Déductibilité des frais d'emprunt

Contexte

Un groupe de sociétés procède à une restructuration de son financement. Société A, Société B et Société C détiennent une participation dans la société de personnes ABC. Dans le cadre de la restructuration du financement du groupe, Société A emprunte auprès d'une institution financière et doit payer des frais d'emprunt. Société A utilise l'argent emprunté pour faire une contribution de capital à la société de personnes ABC. Celle-ci utilise ce montant pour rembourser une dette envers une autre institution financière. Cette dette avait été contractée par la société de personnes ABC en vue de tirer un revenu d'une entreprise. Société A refacture les frais d'emprunt à la société de personnes ABC.

Le sous-alinéa 20(1)e)(ii.2) L.I.R. permet entre autres de déduire sur cinq ans les frais d'emprunt engagés dans le cadre de la restructuration d'une créance ou de sa prise en charge par le contribuable pourvu que les autres conditions soient respectées.

Questions

A) Est-ce que la société de personnes ABC peut déduire sur cinq ans en vertu du sous-alinéa 20(1)e)(ii.2) L.I.R. les frais d'emprunt que lui a facturés Société A?

B) Est-ce que Société A peut déduire pleinement les frais refacturés à l'encontre du revenu provenant de cette refacturation, ayant ainsi un effet nul sur son revenu imposable?

Réponse de l'ARC

Les faits disponibles sont insuffisants et ne permettent pas à l'ARC de déterminer quel serait le traitement fiscal approprié dans la situation décrite ci-dessus.

Il est possible que les opérations ne constituent pas une restructuration de la dette de la société de personnes ABC, de sorte que le sous-alinéa 20(1)e)(ii.2) L.I.R. ne serait pas applicable. De plus, il y aurait lieu d'examiner si les frais facturés par Société A constituent vraiment une dépense pour la société de personnes ABC et si elle est raisonnable dans les circonstances.

Dépendant des faits, il est possible que l'alinéa 20(1)e) L.I.R. soit applicable à l'égard des frais d'emprunt engagés par Société A. Toutefois, les frais d'emprunt ne seraient pas déductibles en vertu de l'alinéa 20(1)e) L.I.R. si le montant reçu par Société A de la société de personnes ABC était inclus dans le calcul du revenu de Société A en vertu de l'alinéa 12(1)x) L.I.R. sans l'application du paragraphe 12(2.2) L.I.R., et que Société A faisait le choix prévu au paragraphe 12(2.2) L.I.R. à l'égard des frais d'emprunt.

Robert Gagnon
(613) 957-9768
2011-041202

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 12 - Subsection 12(2.2)

s. 12(2.2) might apply to on-charge, to ultimate group recipient of financing, of the financing expenses

As part of the restructuring of the financing of its corporate group, Corporation A borrowed from a financial institution in order to make a capital contribution to the ABC Partnership, which used that amount to repay a debt to another financial institution. Corporation A on-charged its borrowing expenses to the ABC Partnership.

Can Corporation A fully deduct the re-invoiced expenses from the income from that re-invoicing, so that there is a nil effect on its taxable income? After noting that there were insufficient facts, CRA stated:

Depending on the facts, it is possible that paragraph 20(1)(e) is applicable in respect of financing expenses incurred by Corporation A. However, financing expenses would not be deductible under paragraph 20(1)(e) if the amount received by Corporation A from ABC Partnership would but for subsection 12(2.2) be included in computing Corporation A's income, and Corporation A made an election under subsection 12(2.2) respecting the financing expenses.

Summary Under

Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) - Subparagraph 20(1)(e)(ii.2)

CRA will evaluate whether the transactions are "restructuring"

After noting that there were insufficient facts, CRA stated:

It is possible that the transactions do not constitute a restructuring of ABC Partnership's debt, so that subparagraph 20(1)(e)(ii.2) would not be applicable. In addition, it would be necessary to consider whether the fees charged by Corporation A truly constitute an expense of the ABC Partnership and whether they were reasonable in the circumstances.

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7 October 2011 Roundtable, 2011-0412021C6 F - Financing Expenses

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