| 24(1) | 5-901472 |
| J. Stalker | |
| (613) 957-9796 | |
| 19(1) | EACC9649 |
September 18, 1990
Dear Sirs:
Re: Paragraph 20(1)(e.1) of the Income Tax Act (the "Act")
In your letter of June 26, 1990 you requested our comments on the application of paragraph 20(1)(e.1) of the Act to loan placement fees or loan structuring fees.
The circumstances referred to in your letter may relate to an actual transaction. The review of the tax consequences of completed transactions, such as the deductibility of loan placement fees in this case, is the responsibility of the district taxation offices of Revenue Canada, Taxation. Although we cannot give specific opinions on completed transactions, we have set out below our general comments on the interpretation issues raised in your letter.
We refer you to the Revenue Canada Round Table discussion held at the 1988 Canadian Tax Foundation Conference where the Department stated (p. 53:18):
In our opinion, the general rule is that expenses incurred after 1987, in respect of issuing securities or borrowing money, are deductible only in equal portions over five years pursuant to paragraph 20(1)(e).
Paragraph 20(1)(e.1) provides an exception to the general rule. Certain expenses, as listed in paragraph 20(1)(e.1), that relate only to the year in which they are payable, may be deducted in the year in which they are payable. Consequently, in the Department's view, if the particular expenses relate to a year other than the year in which they are payable, they will be deductible in accordance with the provisions of paragraph 20(1)(e) rather than paragraph 20(1)(e.1).
This continues to be the Department's position.
It is a question of fact whether a particular fee would meet the requirement that it "...may reasonably be considered to relate solely to the year...". It is our view that a one time fee related to a loan with a term greater than one year, such as a loan structuring fee or loan placement fee, would generally not "...reasonably be considered to relate solely to the year..." in which the loan was made or the services were provided. Examples of fees which would ordinarily be subject to paragraph 20(1)(e.1) (providing all the requirements are met) include a recurring annual agency fee or commitment fee.
Our comments are provided pursuant to the practice referred to in paragraph 24 of Information Circular 70-6R.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate