Principal Issues: Whether financing expenses are deductible under paragraph 20(1)(e)?
Position: No position taken.
Reasons: Not enough facts.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 30
Issue expenses
Paragraph 20(1)(e) allows in certain circumstances an issuer to deduct, over a period of five years, expenses related to the issuance of shares, units of a unit trust (as defined in subsection 108(2) of the Act), or interests in a partnership.
Questions to the CRA
A) If an issuer does not expect to earn income from property, but rather intends to only realize gains (or losses) from the disposition of its investments, would the issue expenses be deductible under the subparagraph 20(1)(e)(i)?
B) If an issuer, such as a unit investment trust, made an election under subsection 39(4) so that gains from the disposition of its investments are capital gains, can its issue expenses be deductible by virtue of subparagraph 20(1)(e)(i)?
C) In the event that your answer to the previous question is negative, would the issue expenses be deductible if a minimum portion of the proceeds of the issue were invested in an income-generating investment?
D) Is your answer qualified if the investment income is lower than the issue expenses?
CRA Response
The facts available do not allow the CRA to specifically answer the questions above. For example, with respect to question A), the facts do not make it possible to determine whether there is a source of income that is a business.
The preamble to subsection 20(1) stipulates that notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto.
No amount can be deductible under subparagraph 20(1)(e)(i) if there is not a source of income that is a business or property. Section 9(3) stipulates that for the purposes of the Act, income from a property excludes any capital gain from the disposition of that property. As a result, the appreciation in the value of a property that is capital property (as defined in section 54) is not in itself a source of income that is property.
On the other hand, property that is capital property may, depending on the circumstances, be a source of income that is property or may be held as part of a business to generate business income.
It should be noted that subsection 39(5) provides that a taxpayer (other than a mutual fund corporation within the meaning of subsection 131(8) or a mutual fund trust within the meaning of subsection 132(6)) who is considered a trader or dealer in securities cannot make the election under subsection 39(4). In addition, the election under subsection 39(4) is not applicable to all investments, but only in respect of "Canadian securities" as defined in subsection 39(6).
If you have concerns about the tax treatment of issue expenses for a particular situation, we suggest that you request a technical interpretation describing the particular situation and your concerns about tax treatment.
Robert Gagnon
(613) 957-9768
2011-041206