Banque Laurentienne – Tax Court of Canada finds that fees paid by the issuer of subscription receipts to the investors themselves were deductible under s. 20(1)(e)

In order to finance an acquisition, Laurentian Bank issued subscription receipts to two private placement investors (the Caisse for $100 million and a labour fund for $20 million) at a subscription price representing a 2% discount to the market trading price, and with the subscription proceeds being held in trust until the closing of the acquisition, at which point, the subscription receipts were converted, without further payment, into common shares of the Bank. The Bank was required by the subscription agreements to pay “transaction fees” of 4% of the subscription amounts on the closing to the investors.

Ouimet J concluded that these transaction fees were deductible at the 20% p.a. rate provided under s. 20(1)(e). He rejected the Crown’s position that the transaction fees were in substance discounts to the issue price, and instead accepted testimony that the taxpayer had received a financing service and a service in the form of a positive signal to the marketplace that the Caisse would become its largest shareholder. In addition to finding that the fees were incurred “in the course of” the subsequent common share issuance, he also rejected a Crown submission that a qualifying fee could not extend to one paid to the subscriber itself.

The Crown also asserted that the fees were unreasonable in amount, but bore the onus in this regard as it had not made this assumption in assessing, and had failed to bring any expert evidence on this issue.

Neal Armstrong. Summaries of Banque Laurentienne du Canada v. The Queen, 2020 CCI 73 under s. 20(1)(e) and s. 67.