The “Taxpayer,” a listed public company, issued Series A Debentures (the “SAD”), and subsequently issued Series B Debentures (the “SBD”) and then, a number of days later, redeemed the SAD, paying a redemption premium (the “Redemption Premium”) for their early discharge. The SAD and SBD purchasers were substantially different. The Taxpayer amortized the Redemption Premium over the remaining term of the SAD pursuant to s. 18(9.1) (with the deduction for two taxation years being under review.)
In finding that the exclusion in s. 18(9.1)(a) did not apply to the payment of the Redemption Premium, the Directorate stated:
[W]here a taxpayer borrows money from an arm’s length party to pay in full or satisfy completely a pre-existing debt owing to another arm’s length party and also pays a prepayment penalty to the latter creditor, the taxpayer may be entitled to deduct the prepayment penalty pursuant to subsection 18(9.1) of the Act over what would have been the remaining term of the obligation. …
[A] prepayment penalty paid to former creditors may not reasonably be considered to have been paid to them in respect of the substitution of a debt obligation where new and different creditors are providing the substituted debt. …[S]ince the SAD Investors are a substantially different group of investors than the SBD Investors … it could not reasonably be considered that the SAD Investors were paid the Redemption Premium “in respect of the substitution of the [SAD]” since it was the SBD Investors, and not the SAD Investors, who provided a substitute debt for the SAD.