Principal Issues: Whether financing expense deductible under paragraph 20(1)(e)?
Position: No position taken.
Reasons: Not enough facts.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 3
Deductibility of borrowing costs
Background
A group of corporations restructured its financing. Corporation A, Corporation B and Corporation C held an interest in the ABC Partnership. As part of the restructuring of the financing of the group, Corporation A borrowed from a financial institution and was required to pay borrowing costs. Corporation A used the borrowed money to make a capital contribution to the ABC Partnership, which used that sum to repay a debt to another financial institution. That debt was incurred by the ABC Partnership to earn income from a business. Corporation A on-charged the financing expenses to the ABC Partnership.
Subparagraph 20(1)(e)(ii.2) permits inter alia the deduction over five years of financing expenses incurred in the course of the restructuring of a debt or its assumption by the taxpayer, provided that the other conditions are satisfied.
Questions
A) Pursuant to subparagraph 20(1)(e)(ii.2), can the ABC Partnership deduct over five years the financing expenses charged to it by Corporation A?
B) 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?
CRA Response
The facts available are insufficient and do not allow the CRA to determine what the appropriate tax treatment would be in the situation described above.
It is possible that the transactions do not constitute a restructuring of ABC Partnership's debt, so that subparagraph 20(1)(e)(ii.2) would not be applicable. In addition, it would be necessary to consider whether the fees charged by Corporation A truly constitute an expense of the ABC Partnership and whether they were reasonable in the circumstances.
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.
Robert Gagnon
(613) 957-9768
2011-041202