29 January 1991 Internal T.I. 9011397 F - Whether Expenses on Account of Capital and Not Laid Out to Earn Income

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.

7-901139 24(1)

We are writing further to your memorandum of June 12, 1990 ("the Memorandum"), in which you requested our opinion as to the deductibility of certain amounts under the Income Tax Act ("the Act") by the above captioned taxpayer.  We regret that our advance rulings workload prevented an earlier response to your enquiry.

Facts

The facts as outlined in the Memorandum are as follows:

24(1)

24(1)

We have proposed to disallow the expense pursuant to 18(1)(a) and 18(1)(b) as the amounts were on account of capital and were not laid out to earn income.

24(1)   has responded that the expense was incurred as a consequence of the Board of Directors discharging their statutory responsibilities to the shareholders and therefore was incurred "in accordance with ordinary principals of commercial practice or with accepted principals of business practice".  They state that as a result the amount would be deductible pursuant to paragraph 18(l)(a).

24(1)

Our opnion

We have recently considered the issue on which you have requested our opinion in relation to another takeover bid involving two major corporations.  We have attached a copy of our memorandum to Vancouver District Office on the matter dated October 11, 1990, a copy of the relevant legal opinion from the Department of Justice dated October 3, 1990, and our request for the legal opinion dated June 19, 1990

We concluded that  24(1) prepared as a result of a takeover bid could not be considered to be for the purposes of gaining, or producing income and thus would not be deductible under paragraph 18(1)(a) of the Act.  In addition, we concluded that the expenses would not be deductible under subparagraph 20(1)(B)(iii) since the better view is that the would not be a financial report.  For these same reasons it is our opinion that the expenses incurred in relation to the  24(1)  would not be deductible.

Although not discussed in the attached material, we note that it is our opinion that the expenditures would also not be considered to be eligible capital expenditures since, as mentioned, they were not incurred to gain or produce income

If you have any further questions or comments, please do not hesitate to contact David Palamar or the undersigned.

ChiefLeasing and Financing SectionFinancial Industries DivisionRulings Directorate Legislative and Intergovernmental Affairs Branch

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