As part of the restructuring of the financing of its corporate group, Corporation A borrowed from a financial institution in order to make a capital contribution to the ABC Partnership, which used that amount to repay a debt to another financial institution. Corporation A on-charged its borrowing expenses to the ABC Partnership.
Can Corporation A fully deduct the re-invoiced expenses from the income from that re-invoicing, so that there is a nil effect on its taxable income? After noting that there were insufficient facts, CRA stated:
Depending on the facts, it is possible that paragraph 20(1)(e) is applicable in respect of financing expenses incurred by Corporation A. However, financing expenses would not be deductible under paragraph 20(1)(e) if the amount received by Corporation A from ABC Partnership would but for subsection 12(2.2) be included in computing Corporation A's income, and Corporation A made an election under subsection 12(2.2) respecting the financing expenses.