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.