(d)-(l)

Paragraph 20(1)(d) - Compound interest

See Also

MacNiven v. Westmoreland Investments Ltd., [2001] 1 All ER 865 (HL)

capitalization of interest through payment and readvance respected

In order to generate an interest deduction for accrued interest owing by an insolvent company ("WIL") to its shareholder (a pension fund) pursuant to a provision of the Corporation Taxes Act 1988 (U.K.) which required that interest be paid in order to be deductible, the pension fund lent money to WIL with WIL using the borrowed proceeds to pay the outstanding arrears of interest. In finding that this arrangement was effective, Lord Nicholls stated (at pp. 868-869) that "prima facie, payment of interest in s. 338 has its normal legal meaning, and connotes simple satisfaction of the obligation to pay ... . Leaving aside sham transactions, a debt may be discharged and replaced with another even when the only persons involved are the debtor and the creditor".

Administrative Policy

S3-F6-C1 - Interest Deductibility

1.82 Interest to pay interest. "Interest… on a second loan that is used to pay interest on a first loan, is deductible…if the interest on the first loan is deductible… ."

1.83 Interest on capitalized interest. [W]here accrued interest is added to the outstanding principal amount of an existing loan resulting in a new obligation or novation, an interest payment will not be considered to have been made. A portion of the interest charged in respect of the new loan will constitute compound interest and may only be deductible under paragraph 20(1)(d) in the year it is paid.

88 C.R. - "Finance and Leasing" - "Interest" - "Deep Discount and Zero Coupon Bonds"

If by reference to all the supporting documents it is determined that an apparent discount is interest, the compound element is only deductible when paid.

Articles

R. Couzin, "Income Tax Treatment of Financing Charges", 1980 Conference Report, p. 191.

Paragraph 20(1)(e) - Expenses re financing

Cases

Besse v. Canada, 99 DTC 5275 (FCA)

In finding that the taxpayer and other investors who made an investment in a building were a syndicate for purposes of s. 20(1)(e), Rothstein J.A. referred, with approval to the following definition appearing in Romano v. MNR, 66 DTC 490, and 500 (T.R.B.):

"Any group of persons who have agreed to pool their resources of money or of specific assets for some common purpose."

He went on to find that various expenses including a commission, mortgage fees and a prospectus preparation fee qualified as expenses of the syndicate rather than the promoter because they became payable only if the closing occurred, i.e., if the syndicate was formed.

Words and Phrases
syndicate

Kalthoff v. The Queen, 90 DTC 6378 (FCTD), aff'd 92 DTC 6001 (FCA)

A finder's fee and a commitment fee paid by the taxpayer in respect of a loan were non-deductible because the loan was made to a corporation which he had incorporated rather than to him personally.

Words and Phrases
syndicate

Macmillan Bloedel Ltd. v. The Queen, 90 DTC 6219 (FCTD)

loss on forward contract to lock in Canadian dollar cost of U.S.-dollar borrowing was issue expense

After the taxpayer had arranged to borrow U.S. $75 million through an issuance of debentures, it entered into forward hedging contracts for the future delivery by it of U.S. dollars at specified conversion rates. The difference between the Canadian-dollar equivalent of the taxpayer's U.S.-dollar borrowing, measured at the spot rate of exchange at the time of closing the issuance of the debentures, and the Canadian dollars (net of a fee charged by The Royal Bank for extending the forward contracts) received (around the time of closing) by the taxpayer under the forward contracts, was held to be a deductible expense under s. 20(1)(e). Collier J.,in accepting the evidence of the taxpayer's expert accountant, stated (at p. 6225):

[W]hen one carefully analyzes the situation, there are, from a business and accounting view, two transactions. There was a loan obtained by the plaintiff in the United States. When the funds became available, there was another transaction: the obtaining of Canadian funds. The loss on the second transaction was, in my view, an expense incurred in the course of borrowing the U.S. funds."

Words and Phrases
expense

The Queen v. MerBan Capital Corp. Ltd., 89 DTC 5404 (FCA)

The taxpayer, which was engaged in the business of merchant banking, incorporated a subsidiary ("MKH") which in turn incorporated another subsidiary ("Holdings"). MKH and Holdings borrowed money from a bank in order to help fund the acquisition by Holdings of the shares of a public company, and the taxpayer provided the bank an indemnity (which the Crown alleged was in substance a guarantee) in respect of the payment of interest on the loans.

In finding that the taxpayer was not entitled under s. 20(1)(e) to deduct payments made by it pursuant to its indemnity, Iacobucci, C.J. stated:

"fundamentally important to the availability of this deduction is that the taxpayer borrow the money to which the expense relates. As already mentioned, MerBan did not borrow any money from the Bank, its subsidiaries MKH and Holdings did, and therefore a deduction under subparagraph 20(1)(e)(ii)( is not available to MerBan."

The Queen v. Antoine Guertin Ltée, 87 DTC 5458, 88 DTC 6126, [1988] 1 CTC 360 (FCA)

As collateral security required for a bank loan, the taxpayer purchased two whole life policies on the lives of its president and manager. The taxpayer was unable to deduct a portion of the premiums equal to what it would have paid for term insurance. The outlays for the premiums were not expenses because they represented the replacement of one asset (cash) by another (insurance) with the result that there was no "appauvrissement dans le patrimoine de l'emprunteur". In order for an expenditure to be deductible as an "expense" under s. 20(i)(e)(ii) it must not give rise to an asset (such as the benefit of even temporary insurance) and it must have no consideration other than obtaining the loan.

Neonex International Ltd. v. The Queen, 78 DTC 6339, [1978] CTC 485 (FCA)

loan prepayment bonus

The taxpayer company used part of the proceeds of a $15 million (U.S.) loan made to it to prepay a $4 million loan which had been made to it 2 years previously at a higher rate of interest. In order to obtain the agreement of the original lender to accept a prepayment of the $4 million loan, the taxpayer was required to pay a bonus of $105,000. It was held that this payment should be regarded only as a bonus paid to induce the first lender to forego its right to hold its first mortage to maturity, rather than as an expense incurred in the course of borrowing money from the second lender.

MNR v. Yonge-Eglinton Building Ltd., 74 DTC 6180, [1974] CTC 209 (FCA)

In connection with the interim construction of a building, the taxpayer agreed in 1962 to pay interest on the borrowed money at a rate of 9%, plus "additional interest", in each of the 25 years after 1964 in which it was profitable, of 1% of its gross rental income from the building. The 1% fee incurred in each year arose in the course of borrowing money, and was deductible. "What appears to me to be the test is whether the expense, in whatever taxation year it occurs, arose from the issuing or selling or borrowing ... the words 'in the course of' in section 11(1)(cb) are not a reference to the time when the expenses are incurred but are used in the sense of 'in connection with' or 'incidental to' or 'arising from' and refer to the process of carrying out or the things which must be undertaken to carry out the issuing or selling or borrowing for or in connection with which the expenses are incurred" (p. 6183).

The fee was not a "commission" or "bonus", and was an "expense".

Words and Phrases
commission in the course of

Riviera Hotel Co. Ltd. v. MNR, 72 DTC 6142, [1972] CTC 157 (FCTD)

The taxpayer required further funds for the expansion of its hotel, which the existing first mortgagee was unwilling to provide. The taxpayer borrowed funds from another lender sufficient in amount to discharge the existing first mortgage loan and finance the expansion. The existing first mortgagee required the payment to it of a premium or bonus (equivalent to six months' interest) in order to give its consent to the prepayment of the existing first mortgage loan.

In finding that the premium or bonus was not paid in the course of borrowing the replacement financing (which was found to be for an income-producing purpose) Cattanach J. stated (page 6145):

"The payment was not made in the course of borrowing money from the first lender but it was made in the course of repaying that money. This being so it follows that the payment to the first lender cannot be construed as an expense incurred by the appellant in the course of borrowing money from the second lender."

Consumers' Gas Co. v. MNR, 65 DTC 5138, [1965] CTC 225 (Ex Ct), briefly aff'd 67 DTC 5196 (SCC)

In connection with a rights offering the taxpayer, in addition to paying a commission to the underwriters in consideration for their services as dealers in securities, paid a fee for their services rendered in forming and managing a soliciting dealers group and in consideration for their agreement to maintain an orderly market, and paid a further fee which was alleged to be for the administrative and clerical services of the dealers in processing the rights tendered by shareholders, but which was described in the relevant agreement as a commission for each common share which a soliciting dealer procured. The taxpayer was unsuccessful in deducting any portion of the latter two fees under s. 11(1)(cb) of the pre-1972 Act because they constituted "commissions" (i.e., recompense to an agent calculated as a percentage of the amount of the transaction) which was paid on account of the security dealers' services as salesmen or dealers in securities.

Words and Phrases
commission

See Also

Emjo Holdings Ltd. v. The Queen, 2018 TCC 97 (Informal Procedure)

“key man” insurance premiums on a universal life policy were non-deductible

Loans made to the taxpayer in 2002 by a credit union to help finance its purchase of shares of a home building company and in 2012 by the Saskatchewan government to finance working capital needs of the taxpayer were in both cases required to be secured in part by an assignment of key man insurance. The taxpayer acquired universal life single life coverage of $1,000,000 in 2002 with respect to the first loan, and term life coverage of $3,000,000 in 2012 with respect to the second loan. In confirming the Minister’s disallowance of the deduction by the taxpayer of the premiums for its 2013 to 2015 taxation years under s. 20(1)(e.2), Smith J first noted (respecting the first loan) that:

  • The policy amount was well in excess of the level of life insurance required by the credit union of $500,000. As a result, the amount of the deduction would have to be adjusted accordingly.
  • S. 20(1)(e.2) required the deduction to “be correlated to the amount of the loan ‘owing from time to time’,” (para. 27) whereas here the amount owing had been reduced to approximately 10% of its original amount at the commencement of the 2013 year (so that the deduction would need to be prorated accordingly) and was repaid in full shortly thereafter (reducing any deduction to nil).
  • No evidence had been adduced to distinguish between the cost of the “universal life” policy in question and “the net cost of pure insurance”, the cost of which would be deductible under s. 20(1)(e.2)(ii).

Respecting the second loan, it was drawn down and repaid on a rolling basis, and there was no evidence of any indebtedness for the 2013, 2014 and 2015 taxation years.

Rio Tinto Alcan Inc. v. The Queen, 2016 TCC 172

failure to advance evidence showing allocation of fees to share consideration

The taxpayer (“Alcan”) incurred various investment dealer, legal and other fees in connection with its successful hostile bid for most of the shares of a French public company in consideration for cash and Alcan shares.

After finding that Alcan had not sufficiently raised the issue of the deductibility of such expenses under s. 20(1)(e) in compliance with the large corporatin rules in s. 165(1.11), Hogan J went on to find that, in any event, there was an insufficient evidentiary basis for the deduction, stating (at para. 201):

[T]he Appellant has offered no evidence to justify an allocation of the fees of the service providers (Morgan Stanley, Lazard Frères and Sullivan Cromwell) to the services required with respect to the share consideration and those required with respect to the non‑share consideration.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees investment dealer fees incurred respecting the advisability of making hostile takeover were fully deductible under s. 9 393
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) investment dealer fees re advisability of making hostile takeover were fully deductible 515
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc) legal fees incurred in securing regulatory approval for a hostile bid related to the bidder's business of earning income from shares and interaffiliate sales 170
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(g) takeover bid circular costs did not qualify 96
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure fees incurred in order to acquire shares were excluded/butterfly expenses excluded as taxpayer was not in the business of implementing corporate reorganizations 343
Tax Topics - Income Tax Act - Section 169 - Subsection 169(2.1) raising general question of deductibility of fees and listing s. 20(1)(e) did not satisfy s. 165(1.11) 228
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) expenses incurred in butterfly spin-off recognized as disposition expenses 61
Tax Topics - Statutory Interpretation - French and English Version finding common meaning of 2 versions of s. 20(1)(bb) 102

International Colin Energy Corp. v. The Queen, 2002 DTC 2185, 2002 CanLII 47015 (TCC)

followed in BJ Services Co. Canada v. The Queen, 2004 DTC 2032, 2003 TCC 900)

The taxpayer paid a fee to a financial advisor, calculated as 0.7% of the market value of its equity and of the amount of its long-term debt net of working capital, in consideration for advice provided in connection with considering alternatives to maximize shareholders' value, with an emphasis on merger possibilities. The transaction ultimately implemented entailed the taxpayer's shareholders selling their shares, pursuant to a plan of arrangement, to another publicly-traded oil and gas company in consideration for treasury shares of that purchaser.

After finding that the fee was deductible in computing the taxpayer's income, Bowman A.C.J. went on to indicate that he found "attractive" the argument that the word "sale" in s. 20(1)(e)(i) did not refer to a sale by the taxpayer company itself (as such an event was covered by the word "issuance") and that "therefore 'sale' must imply something else and the only thing it can refer to is a sale by the shareholders in the course of a corporate transaction of the type involved here where the interests of the corporation are affected".

Sherway Centre Ltd. v. The Queen, 96 DTC 1640 (TCC), aff'd 98 DTC 6121 (FCA)

In order to lend money to the taxpayer at a fixed interest rate of 9.75% per annum, the lenders also required the taxpayer to covenant to pay "participating interest" equal to 15% of the operating surplus generated by the taxpayer's shopping centre in excess of $2.9 million per annum. Bonner TCJ. found that the participating interest payments were deductible under s. 20(1)(e).

212535 Oil & Gas Ltd. v. MNR, 96 DTC 1263 (TCC)

Each taxpayer closed the purchase of a 10% interest in a resource property by giving the vendor an interest-bearing demand promissory note for $3.5 million. Three months later, when it was discovered that the 10% interest had a fair market value of at least $4.75 million, it was agreed that the $3.5 million promissory note would be replaced by one for $4.75 million.

Rip TCJ. found that the only money borrowed ($3.5 million) was borrowed before the debt of $1.25 million was even contemplated. Accordingly, the $1.25 million was not incurred in connection with or incidental to or arising from a borrowing.

The Queen v. Royal Trust Corp. of Canada, 83 DTC 5172, [1983] CTC 159 (FCA)

The Court did not reverse a finding of the trial judge that an underwriting commission paid by the taxpayer to an investment dealer in connection with a public offering of treasury shares of the taxpayer by the investment dealer was for services of the underwriter including the analysis of the price and market possibilities, the bringing about of actual sales to the public on a widely-distributed basis, and administrative services. Accordingly, the Crown's submission that the commission represented a discount from the purchase price paid by the underwriters for the shares, was rejected.

Burrard Dry Dock Co. Ltd. v. MNR, 75 DTC 22, [1975] CTC 2011 (T.R.B.)

The Class A and Class B shares of the taxpayer were held by the public and the Wallace family, respectively. In order to accomplish a capitalization of the undistributed earnings of the taxpayer, Class A shares were converted into Class B shares and the taxpayer issued a stock dividend of five 2% redeemable preference shares for each Class B share. These shares were then redeemed and the main recipients of the stock dividend (the Wallace family) loaned the proceeds received by them back to the taxpayer.

Mr. Flanigan held that the accounting, legal and investment advisory fees incurred in connection with this reorganization all were deductible under s. 11(1)(cb)(i) and noted that it was not necessary for the issuance of the shares to have resulted in the raising of fresh capital.

BACM Industries Ltd. v. MNR, 73 DTC 90, [1973] CTC 2093 (T.R.B.)

In February of 1968 the taxpayer filed a registered statement with a view to the issuance of convertible debentures in the American markets. In May of 1968 it amended the statement with a view to issuing shares instead to the public. Later, after a decline in share prices, the taxpayer entered into an agreement with Sogemines Ltd. in which it raised $3.3 million from the issue of 175,000 common shares, and then financed a business acquisition through the utilization of these cash proceeds and the issuance of a further 365,000 shares. Mr. Cardin stated (at p. 91) that "the different steps taken by the company in financing the expansion of the company's operations constitute an overall financing scheme and the successful realization of the company's project" and found that all of the expenses relating to the various stages of that financing endeavour were deductible under s. 11(1)(cb)(i).

Terry v. MNR, 74 DTC 6017, [1973] CTC 837 (FCA)

When the taxpayer sold its right to receive proceeds of disposition at a discount, the discount did not constitute an "expense".

Les Laiteries Leclerc Inc. v. MNR, 71 DTC 702, [1971] Tax ABC 1061

Professional fees that were incurred for the purpose of a bond issue which did not take place and which was to have been a means of acquiring the assets of a company similar to the taxpayer, were non-deductible. For such expenses to have been incurred in the course of a borrowing of money, it was necessary for the bonds actually to have been issued.

Enterprise Foundry Co. Ltd. v. MNR, 59 DTC 318, 22 Tax ABC 137

The taxpayer wished to create additional preferred shares for the purpose of a stock dividend, to cancel its unissued common shares and to subdivide its issued common shares into Class A and Class B shares. It sought supplementary letters patent with a view to accomplishing all these purposes in one instrument. Mr. Boisvert drew a distinction between the legal and other expenses incurred in connection with issuing the shares and issuing the supplementary letters patent, and found that the latter were not deductible under s. 11(1)(cb)(i). He indicated (at p. 320) that in enacting s. 11(1)(cb)(i):

"The legislator surely had in mind an issue of shares to accrue to the benefit of actual shareholders, or persons wishing to become shareholders, but he never intended to allow as deductible a capital expense incurred to build up an enterprise."

Mr. Boisvert indicated that legal advice respecting the issue of the shares fell into the deductible category rather than being in respect of the issuance of the supplementary letters patent.

Administrative Policy

9 October 2015 APFF Roundtable Q. 1, 2015-0595751C6 F - Deductibility of financing fees and 20(1)(e)(v)

discharge of a debt through its assumption or cash proceeds from sub transferee denies a s. 20(1)(e)(v) deduction

The exclusion in s. 20(1)(v)(v) for settlement occurring "as part of a series of borrowings or other transactions and repayments" applies where (i) the debt of the taxpayer is settled by the taxpayer transferring assets to a subsidiary in consideration inter alia for an assumption of the debt (with the taxpayer being released) – or (ii) where the debt is not assumed on the asset transfer and the taxpayer instead uses cash consideration received from the subsidiary (funded out of a borrowing by it) to discharge the debt. In the second situation, CRA considers that the subsidiary borrowing is a borrowing occurring as part of the series. It considers that in the first situation, the debt assumption is also caught, without indicating how the quoted word specifically apply.

21 January 2015 Internal T.I. 2014-0547431I7 - "Excluded amount" under clause 20(1)(e)(iv.1)(C)

payment to creditor excluded as based on negotiated estimate of formula approximating share value

Canco along with a joint obligor as guarantor (collectively, the “Obligors”), entered into a Credit Agreement which provided that on the occurrence of a change of control, a sale of certain securities to the public or a sale of substantially all of the assets of the Obligors, the Lender would be entitled to receive a “Liquidity Payment,” which was calculated as X% of a formula amount equal to the gross enterprise value of the business of the Obligors minus specified deductions for indebtedness, share subscription proceeds, certain undistributed amounts and certain taxes. Following repayment of the loans in full, the Lender claimed that it was owed a Liquidity Payment, and after arbitration, Canco paid an amount in settlement of all obligations to make the Liquidity Payment.

In finding that this payment was excluded under s. 20(1)(e)(iv.1)(C), CRA stated:

… Rulings has a long-standing position that share value is a “similar criterion”… . [T]o the extent that share price is considered to be a “similar criterion” because it is connected with profitability or similar factors, the same logic should be applicable to “Enterprise Value”. …[Furthermore] it is your view that the Liquidity Payment was used as a substitute for a direct equity investment that the Lender originally wanted but could not acquire.

… The basic parameters of the negotiations were the two different estimates of Enterprise Value. The fact that the parties disagreed on the quantum of Enterprise Value does not mean that the [settlement] Payment was not calculated with reference to Enterprise Value.

…[Conversely] if the Payment’s negotiated nature distances it sufficiently from the Liquidity Payment such that the Payment can no longer be considered to be based on the same factors that underlie the Liquidity Payment, then one is required to consider whether the Payment’s negotiated nature causes it to not be an obligation arising “in the course of” the borrowing under the Credit Agreement.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(3) - Participating debt interest payment to creditor excluded under s. 20(1)(e)(iv.1) as based on negotiated estimate of formula approximating share value 142

9 December 2013 External T.I. 2013-0507931E5 F - Financing fees

cash pool utilization fees could be deductible under s. 20(1)(e)
Question

Three related corporations (Aco, Bco and Cco) are obligated to pay interest at 10% to a financial institution (the "bank") on the net consolidated balances (i.e., bank overdrafts minus cash balances) owing from time to time to the bank, with the company whose cash balance effectively is used by the others in this manner charging a financial services fee of 10% to the others. For example, suppose the respective balances of Aco, Bco and Cco with the bank were: Aco - $100,000 overdraft; Bco - $100,000 overdraft; Cco - $100,000 cash balance. The bank would charge $7,500 to each of Aco and Bco (computed as $150,000*10%*100,000/200,000). Aco would charge a financial services fee of $2,500 to each of Aco and Bco. Would the financial services fee be deductible to Aco and Bco?

Response

After indicating that the fees were capital expenditures, and that there "are arguments for claiming" deductibility under s. 20(1)(e.1), and before referring to the s. 67 limitation, CRA stated (TaxInterpretations translation) that if s. 20(1)(e.1) did not apply, the financial services fees:

could be deducted over five years by virtue of s. 20(1)(e) as they were incurred in the course of borrowings from a financial institution.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Financing Expenditures intragroup cash pool utilization fees are capital expenditures 210
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.1) annual internal cash pool utilization fees likely are deductible under s. 20(1)(e.1) 241

12 December 2012 Internal T.I. 2012-0464411I7 - Indirect Benefit

fee re distribution borrowing

The expenses claimed by a partnership in respect of bank borrowings used to make a distribution to its partners include banker's acceptance fees, whose deduction "may" be governed by s. 20(1)(e). After noting that Document 2005-0161661E5 stated that where a deduction of interest would be allowed under s. 20(1)(c) based on a permitted "indirect use" of borrowed funds (i.e. "fill the hole" of capital), a similar permitted use will be available in respect of a deduction claimed under s. 20(1)(e), CRA stated:

However, we do not appear to have yet considered whether the fee that is entitled to the amortized deduction under paragraph 20(1)(e) will be limited and proportionate to the portion of the borrowed funds that are considered to "fill the hole" of capital (as described in the preceding paragraph) or if no proration will apply to such a fee. If you would like us to consider this issue further.

11 January 2013 External T.I. 2012-0436771E5 - Sale of a business

continued deduction where debt settlement by shareholder rather than taxpayer

The unamortized amount of approximately $20 would be deductible in future periods by Aco in accordance with the formula in s. 20(1)(e)(iii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9.1) penalty paid by shareholder 83
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) sale agreement required loan prepayment penalty 60

Income Tax Technical News No. 44 13 April 2011 [archived]

exchangeable debenture appreciation not recognized

In finding that the appreciated amount of an exchangeable debenture when paid on maturity could not be recognized under s. 20(1)(e), CRA stated:

It follows that the appreciation of the principal amount of a debenture over its face value is a payment on account of capital, the deduction of which is prohibited by paragraph 18(1)(b). Paragraph 20(1)(e) does not apply to such appreciation, because this would be an amount paid on account of the principal amount of the debenture, and therefore an excluded amount for the purposes of paragraph 20(1)(e).

19 September 2008 Internal T.I. 2008-0272441I7 - GUILT LOCK DERIVATIVE

hedging expense to lock in interest rate

In order to effectively lock in the interest rate on bonds to be issued by the corporation at a future date, it enters into a hedging arrangement under which, on the date of issuing the bond, it will receive or make a cash payment under a "gilt lock" hedge that reflects the change in the price of bonds between the date of entering into the hedge and the date of closing out such hedge. CRA indicated that the cost of such a hedge (if a payment was made thereunder) would not qualify as an issue expense incurred "in the course of" the borrowing.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 81
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Financing Expenditures derivative that effectively locked in effective interest rate on proposed bond issuance on income account 111

14 March 2007 External T.I. 2005-0161661E5 - Indirect Use of Funds

indirect use test

Position in 2005-01512117 reversed - financing costs will be deductible under s. 20(1)(e) where the indirect use of the funds test under s. 20(1)(c) is satisfied.

19 October 2005 Internal T.I. 2005-0151211I7 - Financing expenses

reimbursement by sub

Can a subsidiary corporation, D Co, deduct, under s. 20(1)(e), reimbursement payments paid to its indirect parent corporation, A Co, respecting expenses incurred by A Co in connection with the issuance of debentures of A Co? A Co issued debentures to arm's length parties and then lent the proceeds of the debentures to D Co, which used the funds to pay a dividend to its direct parent corporation. CRA stated:

If D Co was required to pay A Co an amount that equalled A Co's issue costs and the reason why D Co made the payment was so that A Co would agree to on-loan the money to D Co, then D Co would not be precluded from deducting its debt financing costs under paragraph 20(1)(e) of the Act since it (D Co) would have incurred a financing expense in the course of a borrowing of money.

2004 APFF Roundtable Q. 34, 2004-008702 -

Where a borrower borrows money from an unrelated lender and on-lends to corporations within the group, the reimbursement by those other corporations of the borrower's issue expenses will give rise to deductions to them under s. 20(1)(e)(ii), but the amount of the reimbursement will be included in the income of the borrower pursuant to s. 12(1)(x) unless it deducts the reimbursement under s. 12(2.2).

5 June 1997 Internal T.I. 7-970472 -

Issue expenses for special warrants to acquire common shares are deductible under s. 20(1)(e).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) 49

26 September 1997 T.I. 972511

"The deduction under subparagraph 20(1)(e)(i) of the Act is clearly only available with respect to costs incurred 'by the syndicate' taxpayer. It is not available to an investor who purchases an interest in the syndicate."

26 July 1996 Internal T.I. 7-961578 -

The fact that costs may have been incurred in order to benefit the shareholders of a corporation rather than for the purpose of earning income from a business or property would not preclude their deduction under s. 20(1)(e).

10 July 1996 Memorandum 961880 (CTO "Deductibility of Borrowing Costs - Moneylenders")

"There is nothing that would restrict the use of paragraph 20(1)(e) of the Act to non-moneylenders. Accordingly, where some moneylenders have elected to utilize 20(1)(e) which provides for a five-year amortization period vs. a GAAP amortization period which might be for a longer period, Audit's decision to accept the five-year amortization period appears reasonable."

30 August 1995 T.I. 952095 (C.T.O. "Deductibility of an Exchange Loss")

A foreign exchange loss realized on the repayment of a U.S.-dollar loan would not be deductible under s. 20(1)(e)(ii). "The losses are really incurred in respect of the repayment of the borrowing and not necessarily in the course of borrowing, thus falling outside the scope of paragraph 20(1)(e)".

4 October, 1994 T.I. 942335 (C.T.O. "Underwriter's Discount")

"In a 'bought' deal where the amount paid is clearly not a non-deductible discount, in order for an expense to be deductible under paragraph 20(1)(e) of the Act, cheques need not cross. However, the expense must be reasonable and separately identified as an amount paid or payable for the underwriter's services."

Revenue Canada Round Table TEI, 16 May 1994, Q. 11 (C.T.O. "Foreign Exchange Gains and Losses")

RC is generally not prepared to accept that foreign currency losses arising as the consequence of the sale of a currency pursuant to the exercise of a forward contract would be an expense incurred in the year in the course of borrowing money.

Revenue Canada Round Table TEI, May 16, 1994, Q. XIII 9411060

"Rescheduling or restructuring of a debt obligation" in s. 20(1)(e)(ii.2) generally describes changes to the rights and obligations of the parties to the debt obligation and may include alteration of payment schedules, extension of maturity dates, alteration of interest rates and conversion or substitution of the original debt obligation to or with a share or another debt obligation.

The terms "conversion or substitution" imply an exchange of the original debt obligation for another share or debt obligation. ...Generally, a repayment of a debt obligation by the issue of another debt obligation would constitute a conversion or substitution.

1 April 1993 T.I. (Tax Window, No. 30, p. 20, ¶2500)

Where there is an acquisition of control of a debtor and of its debt followed in the same day by an amalgamation of the debtor and the purchaser, then provided no election is made under s. 256(9), the amalgamation will be considered to occur on the same day and time as specified in the Certificate of Amalgamation. S.80(2) will deem the debt to have been settled or extinguished immediately before the time that is immediately before the amalgamation, with the result that for purposes of s. 20(1)(e)(v) the debt will be considered to have been settled or extinguished in the taxation year of the predecessor ending immediately before the acquisition of control occurred.

92 C.R. - Q.2

The facts of an arrangement with an underwriter must be examined to ensure that the amount paid to the underwriter is in substance for the underwriter's services rather than representing a non-deductible discount.

89 C.M.TC - Q.2

Costs relating to an assumption of debt are not deductible under s. 20(1)(e).

10 January 1992 Memorandum (Tax Window, No. 17, p. 14, ¶1773)

Expenses relating to a refinancing which do not involve borrowing money are not deductible pursuant to s. 20(1)(e). Generally, such expenses are eligible capital expenditures.

28 March 1991 T.I. (Tax Window, No. 1, p. 19, ¶1174)

S.20(1)(e)(v) does not apply to permit the deduction of unamortized financing costs where only part of the debt is settled or extinguished, e.g., where the taxpayer transfers a 50% interest in a property to a purchaser who assumes 50% of the related indebtedness.

23 February 1990 T.I. (July 1990 Access Letter)

Where a company experiencing financial difficulties has incurred legal fees to arrange new financing or otherwise restructure its affairs, it will depend on the particular facts of the case whether the fees could be considered to be expenses incurred in the course of borrowing money for purposes of s. 20(1)(e).

2 November 89 T.I. (April 90 Access Letter, ¶1191)

Expenses involved in negotiating and evaluating a B.C. employee share ownership plan or B.C. employee venture capital plan seem to constitute mere preliminary steps taken prior to the actual issuance of the shares, and do not qualify for deduction.

20 October 89 T.I. (March 1990 Access Letter, ¶1143)

Expenses incurred by a corporation in the course of issuing warrants of the corporation are not deductible under s. 20(1)(e).

19 September 89 T.I. (February 1990 Access Letter, ¶1102)

RC now extends the policy expressed in IT-309R to disability insurance premiums. However, where the disability policy is offered by the lender, rather than required by the lender as collateral, those conditions will not be satisfied.

9 Aug. 89 T.I. (Jan. 90 Access Letter, ¶1077)

Because of the decision in Antoine Guertin, RC is in the process of reviewing its position on the deductibility of life insurance premiums.

89 C.M.T.C - "Participating Loans"

s. 20(1)(e) does not authorize a deduction for payments made as compensation for the use of money.

88 C.R. - "Finance and Leasing" - "Interest" - "Participating Loans"

S.20(1)(e) generally does not provide a deduction for compensation paid for the use of borrowed money, regardless of form.

88 C.R. - F.Q.3

RC's position on the deductibility of life insurance premiums currently is under review.

87 C.R. - Q.50

Commitment fees paid to a bank may be deductible notwithstanding that the loan ultimately was made by a different bank in substitution for the loan originally sought.

85 C.R. - Q. 19

Financing fees for renegotiating an existing bank loan or line of credit are deductible.

81 C.R. - Q. 21

Underwriting fees paid to an underwriter acting as principal rather than agent are not deductible under s. 20(1)(e) but instead are discounts.

Commissions incurred by financial institutions in the course of borrowing are deductible based on the Canada Permanent case.

81 C.R. - Q.39

Yonge-Eglinton does not support the deductibility under s. 20(1)(e) of participating interest.

79 C.R. - Q.6

Where the bank insists that the promoter guarantee the loan and the guaranteed loan is advanced in full, then the guarantee fee charged by the promoter is deductible in full by the investor.

Articles

R. Ian Crosbie, "Embedded Options: The Controversy as to Character", Corporate Finance, Vol VI, No. 4, p. 552.

Finance

1999 APFF Round Table, Q. 6 (No. 9M19190): Finance's analysis of the Sherway is affected by the fact that in that case both parties were taxable.

Subparagraph 20(1)(e)(i)

See Also

Devon Canada Corporation v. The Queen, 2018 TCC 170, 2018 TCC 170

quaere whether “sale” includes a sale to a 3rd party

Two public-companies made cash payments for the surrender by employees of their options previously granted to them under employee stock option plans, with the surrenders occurring on the closing of their acquisition by other public companies.

After Sommerfeldt J accepted the taxpayer submissions that the surrender payments were deductible as to 75% under s. 111(5.2) (since supplanted by s. 111(5.1)), he went on to briefly describe the taxpayer’s argument, that would have been made in the alternative, that the surrender payments were made by the target companies “in the course of a … sale of… shares of the capital stock of the taxpayer” to the acquirers. He noted that International Colin Energy had found that there were “respectable arguments on either side of the question of whether subparagraph 20(1)(e)(i) … is to be confined to a sale by a corporation of its own shares, or may extend to a sale of its shares by its shareholders” (para. 134), and concluded that it was preferable for him to not address this issue.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure payments made to target’s employees for surrendering their options on target’s acquisition were mostly deductible by it 279
Tax Topics - Income Tax Act - Section 111 - Subsection 111(5.2) stock option surrender payments of target deductible under s. 111(5.2) 63
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition disposition of surrendered stock options occurred under doctrine of merger 287
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base "cost" implies the acquisition of an asset 163

Paragraph 20(1)(e.1) - Annual fees, etc.

Administrative Policy

9 December 2013 External T.I. 2013-0507931E5 F - Financing fees

annual internal cash pool utilization fees likely are deductible under s. 20(1)(e.1)
Question

Three related corporations (Aco, Bco and Cco) are obligated to pay interest at 10% to a financial institution (the "bank") on the net consolidated balances (i.e., bank overdrafts minus cash balances) owing from time to time to the bank, with the company whose cash balance effectively is used by the others in this manner charging a financial services fee of 10% to the others. For example, suppose the respective balances of Aco, Bco and Cco with the bank were: Aco - $100,000 overdraft; Bco - $100,000 overdraft; Cco - $100,000 cash balance. The bank would charge $7,500 to each of Aco and Bco (computed as $150,000*10%*100,000/200,000). Aco would charge a financial services fee of $2,500 to each of Aco and Bco. Would the financial services fee be deductible to Aco and Bco?

Response

After indicating that the fees were capital expenditures, and that there "are arguments for claiming" deductibility under s. 20(1)(e.1), and before referring to the s. 67 limitation, CRA stated (TaxInterpretations translation):

[T]here are arguments ... that the above expenses constitute service fees or similar fees ... . In addition, these expenses seem to relate solely to the year. ...[T]here [also] are arguments for claiming that the corporations incur such expenses with a view to borrowing money which they intend to use for the purpose of earning income from a business or property (other than money used to acquire property that would generate exempt income), as these expenses relate to the loans provided by the financial institution.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Financing Expenditures intragroup cash pool utilization fees are capital expenditures 210
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) cash pool utilization fees could be deductible under s. 20(1)(e) 192

12 August 2010 Internal T.I. 2009-0328671I7 - Deduction pursuant to paragraph 20(1)(e)

relate solely to year of restructuing where debt is eliminated

Significant legal and consulting fees related to a CCAA restructuring which involved debt restructuring. In response to a query as to whether, where "the indebtedness with respect to a specific creditor was terminated as a result of such restructuring process…such expenses can be considered to relate ‘solely to the year' and, therefore, be eligible for deduction pursuant to paragraph 20(1)(e.1)," CRA stated:

Paragraph 20(1)(e.1) of the Act provides that, notwithstanding paragraph 20(1)(e), certain financing expenses that relate only to the year they are incurred are deductible in that year. The fees deductible under paragraph 20(1)(e.1) include standby charges, guarantee fees, registrar fees, transfer agent fees, filing fees, service fees, or any similar fees, provided such fees are not:

  • contingent or dependent upon the use or production from property;
  • computed by reference to revenue, profit, cash flow, commodity price, or any other similar criterion; or
  • computed by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation.

If the expenses listed in your submission fulfill the above-mentioned conditions, they may be eligible for deduction under paragraph 20(1)(e.1)….

19 October 2005 Internal T.I. 2005-0151211I7 - Financing expenses

A Co, a public company, issued interest-bearing debentures to arm's length parties, and on-lent the borrowed money to its "great-granchild" subsidiary (D Co) at the same interest rate. In response to a query as to whether the fact that the indebtedness of D Co is for a term of XX years would preclude it from deducting amounts under s. 20(1)(e.1), the Directorate stated:

D Co would have to demonstrate that the amount that it wants to deduct related "solely to the year" in respect of which it is seeking the deduction. We have no evidence that this is the case….

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) reimbursement by sub 147

September 1990 T.I. 1990-101

reccuring annual commitment fee would be covered

In response to a query as to the application of s. 20(1)(e.1) to loan placement fees or loan structuring fees, the Directorate stated:

It is our view that a one time fee related to a loan with a term greater than one year, such as a loan structuring fee or loan placement fee, would generally not "... reasonably be considered to relate solely to the year ..." in which the loan was made or the services were provided. Examples of fees which would ordinarily be subject to paragraph 20(1)(e.1) (providing all the requirements are met) include a recurring annual agency fee or commitment fee.

10 May 1990 T.I. (October 1990 Access Letter, ¶1455)

NAL fee

Guarantee fees paid by a financial institution to its parent corporation in respect of loans made to the taxpayer could qualify for deduction under s. 20(1)(e.1).

88 C.R. - "Finance and Leasing" - "Standby Charge, Guarantee Fee etc."

If particular expenses relate to other than the year they are payable, then they are deductible in accordance with the provisions of s. 20(1)(e) rather than (e.1).

Articles

Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.

Treatment of fees as s. 20(1)(e.1) deductions (pp. 10:22-3)

It is unlikely that the initial professional fees related to the financing of a major construction project would be deductible under paragraph 20(l)(e.l). Any other annual fees, however, that can reasonably be considered to be annual costs should be annually deductible under this paragraph. Similarly, subsection 21(1) allows a taxpayer to capitalize these costs to the related depreciable property acquired….

Boulton, "Bankers' Acceptances Smooth Canadian-U.S. Cross-Border Credit", International Financial Law Review, November 1996, p. 32.

Paragraph 20(1)(e.2) - Premiums on life insurance used as collateral

Administrative Policy

26 November 2013 External T.I. 2012-0449631E5 F - Amount deductible under paragraph 20(1)(e.2)

reduction of deductible premium amount re pledged policy where net cost of pure insurance (“NCPI”) is lower than premiums

A corporation transferred an interest in a life insurance policy to a restricted financial institution to secure a line of credit, that was only used for some months during the year. How is the deductible amount under s. 20(1)(e.2) calculated? In the course of a general response, CRA stated:

The use of the words "in respect of the year" as used in the preamble of paragraph 20(1)(e.2) ensures that at any time in respect of the year that a taxpayer owes an amount on a line of credit, paragraph 20(1)(e.2) will allow the deduction of a portion of the lesser of the premiums payable by the member for the year under the life insurance policy or the NCPI. This portion must be an amount that can reasonably be considered to relate to the outstanding amount of the line of credit and not the available credit. …

In the situation you described, if the NCPI is lower than the premiums payable, it does not seem reasonable to conclude that the total amount of the NCPI for the year would be deductible by virtue of paragraph 20(1)(e.2) in computing the income of the corporation.

May 1999 CALU Conference No. 9908430 Q.10

The premiums under universal life insurance policy paid in a year are considered to be in respect of that year.

30 September 1994 Memorandum 941452 (C.T.O. "Borrowings & Excess Insurance Collateral")

Where the life insurance coverage under an assigned policy is $500,000 and the average balance owing under the borrowing is $200,000, the amount deductible under s. 20(1)(e.2) is limited to 40% of the lesser of the premiums payable and the net cost of pure insurance under the policy for the year. Furthermore, the assignment must represent a genuine requirement of the borrowing.

1 August 1991 Memorandum (Tax Window, No. 7, p. 3, ¶1381)

Among the factors which RC would consider relevant to whether the amount of the premium may reasonably be considered to relate to the outstanding debt, are whether other assets have been pledged to the lender, whether the lender requires collateral in excess of the loan balance, and whether the assets pledged as security are difficult to value.

IT-309R2 "Premiums on Life Insurance used as Collateral"

Paragraph 20(1)(f) - Discount on certain obligations

Cases

Provigo Inc. v. Canada, 2009 DTC 5877, 2008 FCA 205

The taxpayer, which pursuant to a right accorded to it in debentures, repaid the debentures by issuing shares with a fair market value greater than the principal, was not permitted to deduct the excess value of the shares under s. 20(1)(f). The deduction under s. 20(1)(f) "is limited to a 'point-in-time expense' represented by the discount calculated at the time an obligation was issued, so that no deduction was available for an alleged appreciation of the principal amount over time". (para 8).

Imperial Oil Ltd. v. Canada; Inco Ltd. v. Canada, 2006 DTC 6639, 2006 SCC 46, [2006] 2 S.C.R. 447

In finding that the taxpayers were not entitled to recognize deductions under s. 20(1)(f)(ii) at the time they repaid U.S.-dollar denominated debentures following an appreciation in the U.S. dollar, LeBel J. noted that he was not convinced that the cost of dealing in foreign currency was an intrinsic cost of borrowing for the purpose of the Act in that a foreign exchange loss is a cost of borrowing only where the thing borrowed is foreign currency, and that if s. 20(1)(f) applied to foreign exchange losses, the section would operate quite differently in relation to foreign currency and Canadian dollar obligations. Conversely, s. 39, although a residual provision, was a statement of Parliament's intent to treat foreign exchange losses as capital losses.

Administrative Policy

Income Tax Technical News No. 44 13 April 2011 [archived]

exchangeable debenture appreciation not recognized

Before the decision in Imperial Oil Ltd. and Inco Ltd....CRA's position with respect to exchangeable debentures issued with or without an original discount was that a deduction was generally available under paragraph 20(1)(f) with respect to the original discount as well as the appreciation of the principal amount of the debenture over its face value, provided that such appreciation was inherent to the terms and conditions of the debenture. ...

In light of...Tembec...our above-mentioned position is not supportable at law. Hence, this case limits the deduction of financing costs provided for by paragraph 20(1)(f) to the original discount, granted when an obligation is issued.

29 October 2010 Internal T.I. 2010-0357241I7 - Exchangeable Debenture

In response to a query as to whether the taxpayer would be entitled to a deduction under s. 20(1)(f)(ii) on the partial redemption of a Note that was exchangeable into "Underlying Shares," CRA stated:

Prior to Imperial Oil Ltd. v. Canada, the CRA's position with respect to the exchangeable debentures with or without an original discount was that a deduction was generally available under paragraph 20(1)(f) with respect to the original discount as well as the appreciation of the principal amount of the debenture over its face value, provided that such appreciation was inherent to the terms and conditions of the debenture.

In light of the decision of the Federal Court of Appeal in the Tembec case, we are now of the view that our above-mentioned position is not supportable at law. Hence, this case limits the deduction of financing costs provided for by paragraph 20(1)(f) to the original discount, granted when an obligation is issued. The appreciation of the principal amount of the debenture over its face value is not deductible under paragraph 20(1)(f). This represents a change of position and will therefore be administered on a prospective basis to debentures issued on or after January 1, 2010. In this respect, a debenture issued prior to January 1, 2010 but modified on or after that date will be considered issued on or after January 1, 2010.

Income Tax Technical News-41, 23 December 2009

Under "Exchangeable Debentures - paragraph 20(1)(f)".

23 October 2002 Internal T.I. 2002-013579 -

A foreign exchange loss realized on the settlement of a foreign currency debt of the taxpayer would be recognized under s. 39(2) rather than under s. 20(1)(f). "For purposes of paragraph 20(1)(f) of the Act, we believe that the time at which the 'principal amount' is to be determined should be at the time of issue and this is the relevant time at which the discount, if any, should also be ascertained." Documents relating to exchangeable debentures can be distinguished on the basis that there was no issue in those cases that paragraph 20(1)(f) was the relevant provision of the Act.

17 April 1997 Internal T.I. 7-970337 -

Where existing mortgage loans made to farmers had their terms changed so that the principal was linked to a commodity price, a payment in excess of the amount for which the obligation was issued would be deductible at maturity under s. 20(1)(f).

30 July 1990 Decision Summary 90063 (Tax Window, Prelim. No. 1, p. 9, ¶1000)

The issuer of an exchangeable debenture will be entitled to a deduction under s. 20(1)(f) equal to the difference between the fair market value of the shares delivered to the holder of the exchangeable debenture and the amount for which the exchangeable debenture was issued.

Articles

Smith, "Recent Transactions: Debt", 1993 Conference Report, p. 19:14

Discussion of whether a debenture that is payable in shares valued at a 5% discount is eligible for the deduction.

Paragraph 20(1)(g) - Share transfer and other fees

Cases

Canada v. Rio Tinto Alcan Inc., 2018 FCA 124

takeover bid circular was not a financial report

The taxpayer, a Canadian public company listed on the TSX and NYSE and in London, made a hostile bid for a French public company (“Pechiney”). In confirming the finding of Hogan J that expenses of $2.5 million incurred in preparing and sending the takeover bid circular to the Pechiney shareholders were not deductible under s. 20(1)(g)(iii), Pelletier JA stated (at paras. 115-116):

The argument with respect to subparagraph 20(1)(g)(iii) is, in essence, a debate about whether the documents in issue were “financial reports”. …

In this case, the Tax Court found that the relevant documents contained much more than financial information, as was the case in Boulangerie St-Augustin… . The Tax Court found that… it could not determine whether the fees in issue were incurred specifically for the purpose of printing financial information —as opposed to the terms and conditions and other information contained in the documents—and issuing it to Alcan or Pechiney shareholders.

Words and Phrases
financial report
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Oversight or Investment Management dealer and professional fees incurred by a public board in determining to make a bid, as contrasted to implementation, were currently deductible 336
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) deduction was available for advisory fees respecting proposed acquisitin or divestiture of a whole company 472

See Also

Rio Tinto Alcan Inc. v. The Queen, 2016 TCC 172

takeover bid circular costs did not qualify

The taxpayer, a Canadian public company listed on the TSX and NYSE and in London, made a hostile bid for a French public company (“Pechiney”). In finding that expenses of $2.5 million incurred in preparing and sending the takeover bid circular to the Pechiney shareholders were not deductible under s. 20(1)(g)(iii), Hogan J stated (at para. 135):

... The Court is unable to discern whether these expenses were incurred specifically for the purpose of printing financial information and issuing it to the Appellant’s shareholders or to the Pechiney shareholders. The documents contained much more than financial information. ...

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees investment dealer fees incurred respecting the advisability of making hostile takeover were fully deductible under s. 9 393
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) investment dealer fees re advisability of making hostile takeover were fully deductible 515
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc) legal fees incurred in securing regulatory approval for a hostile bid related to the bidder's business of earning income from shares and interaffiliate sales 170
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure fees incurred in order to acquire shares were excluded/butterfly expenses excluded as taxpayer was not in the business of implementing corporate reorganizations 343
Tax Topics - Income Tax Act - Section 169 - Subsection 169(2.1) raising general question of deductibility of fees and listing s. 20(1)(e) did not satisfy s. 165(1.11) 228
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) failure to advance evidence showing allocation of fees to share consideration 131
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) expenses incurred in butterfly spin-off recognized as disposition expenses 61
Tax Topics - Statutory Interpretation - French and English Version finding common meaning of 2 versions of s. 20(1)(bb) 102

Boulangerie St-Augustin Inc. v. The Queen, 95 DTC 164 (TCC), briefly aff'd 97 DTC 5012 (FCA)

Information circulars mailed by a corporation to its shareholders in response to three takeover bids provided information for their decision respecting the takeover bids and contained little financial information (such as financial statements). Accordingly, the related expenses did not qualify for deduction under s. 20(1)(g)(iii).

Administrative Policy

30 November 1991 Round Table (4M0462), Q. 5.2 - Fees for an Impartial Opinion (C.T.O. September 1994)

The circular that the board of directors of a target corporation is required to submit to shareholders containing a recommendation that the shareholders will accept or reject the takeover offer, is not a financial report within the meaning of s. 20(g)(iii).

Paragraph 20(1)(j) - Repayment of loan by shareholder

Administrative Policy

12 June 2012 STEP Roundtable, 2012-0442911C6 - STEP CRA Round Table - June 2012

A shareholder loan repaid by the executors of the shareholder within one year after the end of the creditor's taxation year in which the loan was made will be treated in the same manner as a repayment by a surviving shareholder.

CRA stated that where the loan is not repaid by the estate within one year:

[T]he Estate can claim the deduction under paragraph 20(1)(j) in the year a repayment is made to the extent that the deceased person had included the amount of the loan in computing his or her income pursuant to subsection 15(2) in a preceding taxation year….[H]owever…CRA has indicated in technical interpretation 9918015 that [this] position in paragraph 32 of IT-119R4 does not apply where the loan is subsequently repaid by a beneficiary of the Estate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.6) repayment by executors 132

92 C.R. - Q.44

Although there is no statutory relief to a non-resident where a particular loan, that previously was subject to s. 15(2) and s. 214(3)(a), is repaid, RC will give consideration to a request that the amount of tax should not be subject to withholding tax a second time if, and when, a dividend is paid to the non-resident.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.6) 56

92 C.R. - Q.43

Where a shareholder maintains an open running loan account with a corporation, any repayment is part of a series of loans where the transactions and repayments unless there is clear evidence to the contrary.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2) 29

Articles

Wilson, "Repayment of Shareholder Loans", 1995 Canadian Tax Journal, Vol. 43, No. 3, p. 746.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt 10

Paragraph 20(1)(l) - Doubtful or impaired debts

Cases

Groscki v. Canada, 2011 DTC 5097 [at 5886], 2011 FCA 174

deduction not labelled

The taxpayer made a $12,000 deduction under s. 20(1)(l) for a doubtful debt in 2002 but did not report the amount deducted as income in the following taxation year. The trial judge treated the s. 20(1)(l) deduction as if it had been a s. 20(1)(p) deduction for a bad debt, and dismissed the taxpayer's appeal when the taxpayer was unable to show that there was a debt that had become unrecoverable in 2002. The Court of Appeal affirmed the decision at trial. Trudel J.A. stated (at para. 9):

I agree that if the reserve which the appellant purports to have claimed for doubtful debts for his 2002 taxation year was treated as such and included in his income for the subsequent taxation year, as was required by paragraph 12(1)(d), he was entitled to a $12,000 deduction in 2002 regardless of the label placed on the deduction which he claimed.

Langdon v. Canada, 2000 DTC 6203 (FCA)

not included if not reported

The taxpayer was not entitled to claim a deduction under s. 20(1)(l) because the sale giving rise to the receivable had not been reported in his return for the year of disposition. The Court rejected a submission that the requirement in ss.12(1)(b) and 20(1)(l) that the amount receivable have been "included in computing" income required only that the taxpayer have taken that amount into account in computing his net income and did not establish a requirement that the amounts be reported on a tax return. Strayer JA stated (at para. 9):

Such a condition would be almost meaningless if the words "included in computing" did not require the reporting of such income in a current or previous return. That is, the Minister must be able to track back to a particular source of income if a deduction for doubtful debts is to be accepted in respect of that source.

Words and Phrases
included

Bell v. The Queen, 92 DTC 6064 (FCTD)

The taxpayer was unable to deduct accrued interest on an uncollectible loan because the loan was included in the property that vested in the taxpayer's trustee in bankruptcy after the taxpayer had made a personal assignment in bankruptcy.

Coppley Noyes & Randall Ltd. v. The Queen, 91 DTC 5291 (FCTD), varied on appeal 93 DTC 5196, 5508 (FCA).

The taxpayer for tax and financial statements purposes claimed reserves for doubtful accounts which were significantly in excess of its actual bad debt write-offs for the following year in light of its policy of continuing to make sales to high risk and past due accounts rather than writing off such accounts. Reed J. accepted evidence that the reserves were claimed in accordance with generally accepted accounting principles, and found that the application of such principles "is more consonant with the purposes of the Act than is a departure therefrom" (p. 5302).

Gibraltar Mines Ltd. v. The Queen, 83 DTC 5294, [1983] CTC 261 (FCA)

The "debt" need not be for the price of merchandise sold or services rendered in the course of business, but may also represent business expenses for which the taxpayer is entitled to reimbursement from another party.

Words and Phrases
debt

Picadilly Hotels Ltd. v. The Queen, 78 DTC 6444, [1978] CTC 658 (FCTD)

It was found that some default in payments by a purchase of depreciable property, and some doubts by the taxpayer-vendor as to the purchaser's management abilities, did not establish, on the balance of probabilities, that the collectibility of the amounts payable by the purchaser was doubtful.

Harlequin Enterprises Ltd. v. The Queen, 77 DTC 5164, [1977] CTC 208 (FCA)

Sales of books were made each year by the taxpayer to a distributor. The taxpayer was obliged to repurchase any books which the distributor might elect to return. The taxpayer at the end of each year was not entitled to deduct a reserve in respect of estimated returns. "[T]here had not been any history of uncollectable accounts between the Appellant and the [distributor]. Thus, historically, there was no reason or basis for setting up a reserve for bad debts, nor in fact, was such a reserve ever set up."

Simpson v. The Queen, 76 DTC 6350, [1976] CTC 600 (FCTD)

Addy, J. stated, obiter, that "all accounting for taxation purposes must be in accordance with proper accepted accounting principles" and that it accordingly was improper for a firm to postpone deducting amounts which already were doubtful debts.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(1) 29

See Also

Delle Donne v. The Queen, 2015 TCC 150

doubtful debt reserve claimed implicitly as at the year end in light of subsequently revealed information

The taxpayer made a loan, bearing interest at 25%, to a corporation ("SA") owned by his brother-in-law, which in turn lent the funds, at the same rate of interest, to an arm's length Canadian-resident corporation ("EMB"), which received those funds as part of a Ponzi scheme. The principal of EMB committed suicide on 17 March 2010, media accounts suggested a Ponzi scheme, and on 6 April 2010, SA filed notice of intention to make a proposal under the Bankruptcy and Insolvency Act.

The T5 for 2009 issued to the taxpayer by SA showed all the interest for 2009. He did not include it in his return (apparently filed in April 2010), and attached an explanatory letter stating that the interest was "never earned, payable nor collectible" and the 25 March 2010 report of the EMB receiver.

The Minister assessed inter alia on the basis that, as the 2009 interest had not been included in the taxpayer's return, no deduction could be claimed under s. 20(1)(l) or (p) and that, in any event, the debt for the interest was not doubtful as of 31 December 2009.

Owen J found that the taxpayer was entitled to rely on either para. (l) or (p) to deduct the entire amount. Contrary to the Minister's focus on available information as of 31 December 2009, "instead, the taxpayer may rely on information that comes into existence after the end of the year, but before the filing-due date, to fulfill his…obligation to report…" (para. 69), so that "the taxpayer must determine whether or not the debt was doubtful at the end of the taxation year, taking into account all information available up to the filing-due date for that year" (para. 70).

Respecting the Minister's submission (at para. 59) "that, because no written demand to pay the Interest was made by the Appellant, there can be no doubtful or bad debt," Owen J noted that this failure merely meant that the interest was added to the principal amount instead, which is to say that it was still owed to the taxpayer, and stated (at para. 60):

Although the precise meaning of the word "debt" may be the subject of some debate, it certainly encompasses a contractual obligation to pay an ascertainable sum such as the Interest, regardless of whether or not a demand for payment had been made by the Appellant.

Finally, there is no requirement that the taxpayer specifically report an amount from a doubtful or an uncertain debt as income in his return in order for it to be "included in computing the taxpayer's income." Owen J stated (at para. 64):

The fact that the Appellant reported the Interest in a manner that did not record it as income on a line of his 2009 T1 income tax return does not alter the fact that the interest was included in his income for 2009 by virtue of the application of the provisions of the ITA to the facts.

See summary under s. 20(1)(p)(i).

Words and Phrases
included
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(11) - Investment Contract "debt" exists irrespective of demand 87
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) reserve could be claimed on appeal 82
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(i) bad debt deduction taken as at Dec. 31 in light of information available at April 30, and could be claimed implicitly or on appeal 452

Cloverdale Paint Inc. v. The Queen, 2007 DTC 243, 2006 TCC 628

The wholly-owned U.S. subsidiary of the taxpayer accumulated a large balance owing to the taxpayer as a result of its purchase of paint inventory over the years. In the taxation year in question, the subsidiary was in financial difficulty. MacArthur J. found that the taxpayer had shown that the "liquidation" method (under which an allowance for doubtful accounts was deducted equal to the difference between the amount owing and the net realizable value of the subsidiary's assets) was a reasonable method for computing the allowance, and that the burden then shifted to the Crown, who failed to provide any evidence as to why the liquidation approach was not acceptable. The debt owing also was doubtful in light of the financial position of the subsidiary.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 110

92735 Canada Ltd. v. The Queen, 99 DTC 771 (TCC)

reserve available from outset

Advances totalling approximately $4.9 million that the taxpayer made to a corporation over the course of nine years were found to be doubtful from the outset and in their entirety given that at no point was the corporation in a position to pay either the principal or the interest. Accordingly, the interest income that accrued in each year was offset by a doubtful debt reserve.

Administrative Policy

26 July 1995 T.I. 951573 (C.T.O. "Bad Debts - Financial Institutions")

RC will not follow the accounting standard for "Impaired Loans" that was recently approved by the CICA, nor the guidelines for federally regulated financial institutions issued by OSFI with respect thereto.

19 March 1992 Memorandum 920775 (April 1993 Access Letter, p. 134, ¶C20-1140; Tax Window, No. 18, p. 6, ¶1820)

Discussion of the reserve by an account holder or investment certificate holder of a financial institution in bankruptcy.

2 July 1991 T.I. (Tax Window, No. 5, p. 18, ¶1325)

The principal factors to be considered respecting the presence of a money-lending business are whether loans have been made or debts created, the presence of a debtor/creditor relationship and an intention of the taxpayer to earn interest income. Accordingly, a leasing business may not be a money-lending business.

Subparagraph 20(1)(l)(ii)

Articles

Arthur Driedger, Stephen Wong, "IFRS 9: Financial Instruments", Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p.6

Replacement for publicly reportable entities of IAS 39 by IFRS 9 (p. 6)

Effective after 2017 (November 1, 2017 for certain FIs), IFRS 9, “Financial Instruments” (IFRS 9) became the governing accounting standard for publicly accountable enterprises in Canada….

S. 20(1)(l) reserve for doubtful loans of money-lender (p. 6)

The deductible reserve is in essence the lesser of a reasonable amount and 90 percent of the reserve or allowance for impairment determined in accordance with GAAP.

Predictive elements in IFRS 9 standard (p.6)

The impairment model under IFRS 9 adopts a risk-weighted approach, and unlike the old accounting standards, it incorporates predictive elements, which cloud the amount of the permissible deduction to a taxpayer. The expected-credit-loss model comprises the following three stages:

  • Stage 1. An allowance is recorded on the initial recognition of a non-credit-impaired financial asset The allowance under this stage is measured on the basis of the expected lifetime cash shortfalls that would result if a default occurs within 12 months after the reporting date, weighted for the probability of a default
  • Stage 2. The allowance is recorded relating to a financial asset or a group of financial assets where there has been a significant increase in credit risk since the initial recognition. In this stage, the amount of loss allowance is equal to the expected credit loss over the life of the financial asset
  • Stage 3. The allowance for credit-impaired loans is recorded. In this stage, one or more events have taken place to cause the financial asset to become impaired.

Potential differences with s. 20(1)(l)(ii)(D) (p.6)

There is some concern that only stage 3 amounts are impaired as required by clause 20(1)(l)(ii)(D).

…If the CRA takes a strict interpretation of the new accounting standard and clause 20(l)(l)(ii)(D), a taxpayer may be required to follow an incurred-loss model for impairment, as before under old Canadian GAAP 3025/IAS 39….