A predecessor of the taxpayer had issued an exchangeable debenture exchangeable into share of a corporation (“Corporation 2”) of which the taxpayer was one of the shareholders. Subsequently, the taxpayer sold the shares at a capital gain and repaid the exchangeable debenture including a cash premium (the “Premium Paid”) reflecting the appreciation in the underlying shares. Another predecessor of the taxpayer monetized its shares of Corporation 2 by entering into a forward sale with a third party (the “Purchaser”) and pledging that forward sale agreement and its shares to a Bank as security for a loan. This forward transaction was subsequently closed out by the taxpayer in connection with its sale of the Corporation 2 shares and use of the proceeds to repay the loan and pay a cash Maturity Payment to the Purchaser based in part on the appreciation in the shares’ value.
In its financial statements, the taxpayer included the amounts of the Premium Paid and the Maturity Payment in the amount of its interest expense, which it deducted. On audit, its representative instead submitted that the two payments were deducted pursuant to s. 20(1)(f)(i).
The Directorate found that the application of s. 20(1)(f) to the Premium Paid was to be determined in accordance with CRA’s policy applicable to debentures issued before 2010. However, under that policy, only half of the Premium Paid was deductible (under s. 20(1)(f)(ii) rather than (i)) in light of the size of the discount between the value of the underlying shares on the maturity date (viewed under that previous policy as being the principal amount) and the face amount of the debentures.
Respecting the Maturity Payment, it did not satisfy the s. 20(1)(f) wording, as a “forward transaction cannot be considered to be any bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation” (Federated Co-op was cited in this regard). Accordingly, the Maturity Payment was a payment on capital account whose deduction claimed under s. 20(1)(f)(i) should be denied.