| April 30, 1990 | |
| Audit Programs Directorate | Financial Industries |
| Audit Applications Division | Division |
| K.R. Warren | Peter Lee |
| Director | 957-2745 |
| Attention: Ian J.D. Rathwell | File No. 7-4728 |
SUBJECT: 24(1)
This is in reply to your memorandum of February 15, 1990 wherein you requested our opinion regarding 24(1)
Facts
Our understanding of the facts is as follows:
1. 24(1)
2. 24(1)
3.
4. 24(1)
Issues
5. The issues on which you have requested our opinions are:
(a) 24(1)
(b)
District Office Opinion
6. The Calgary District Office is of the opinion that the Rescheduling Fee is neither deductible under paragraph 20(1)(e) of the Act not under any other provisions of the Act.
Taxpayer's Opinion
7. The taxpayer's representative 24(1) Therefore, in his opinion the Rescheduling Fee is deductible under paragraph 20(1)(e) of the Act as the fee was incurred in the course of borrowing money. His alternative argument is that the Rescheduling Fee will be deductible under paragraph 20(1)(f) of the Act in subsequent years in accordance with the comments in paragraph 5 of Interpretation Bulletin IT-341R.
Your Opinion
8. In your opinion the portion of the Rescheduling Fee that can reasonably be considered to relate to the Credit Facility is deductible under paragraph 20(1)(e) of the Act. You believe that 19(1) argument that the "prepaid interest" is not prepaid interest but additional debt assumed by 24(1) is correct.
Our Opinion
9. We agree with your opinion that the portion of the Rescheduling Fee that may reasonably be considered to relate to the Credit Facility is deductible under paragraph 20(1)(e) of the Act. In our opinion however the portion of the Rescheduling Fee that can reasonably be considered 24(1)
24(1) In our opinion paragraph 20(1)(f) of the Act is not applicable to the Debenture Fee but it may be considered an eligible capital expenditure within its meaning under paragraph 14(5)(b) of the Act and accordingly a deduction may be claimed under paragraph 20(1)(b) of the Act. Our rationale is explained in the following paragraphs.
10. Under common law principles, payment involves the performance of an obligation, and not merely its discharge. Performance requires that the debtor actually parts with something, other than his promise to pay in the future, such as cash, a non-postdated cheque, or other goods and services. Where a debtor gives a security or other evidence of indebtedness to a creditor, he has not parted with anything even if the instrument is accepted in absolute satisfaction of the original debt. Lord Greene stated in Cross v. London and Provincial Trust Limited, (1938) 1 All ER 428 (CA), at page 433: "The tree has produced no fruit ... The owner of the tree has refuse to allow it to be picked, and has merely given a voucher entitling the holder to pick it at a future date." In that case, an interest-bearing bond was issued in place of interest on a loan. The court decided that there was no interest payment until the bond was paid through redemption or cancellation. We cannot distinguish the case at hand from the Cross case and accordingly, 24(1)
24(1)
11. 24(1) we considered the comments of Estey, J., in Stock Exchange Building Corporation Ltd. v. M.N.R., 55 DTC 1014 (SCC), wherein he stated (page 1016):
"There is, with respect to the principal sum of $550,000.00, the relationship of lender and borrower, but, as to the interest, it is difficult to find any other relationship than that of debtor and creditor, particularly as the language in the Indentured goes no further than to say 'and interest on overdue interest at the said rate.' In the circumstances, there is not here present that relationship of lender and borrower, see M.N.R. v. T.E. McCool Ltd.. 1950 S.C.R. 80 (49 DTC 700)."
Similarly in the case at hand a relationship of lender and borrower did not exist between 24(1) A fee is deductible under subparagraph 20(1)(e)(ii) of the Act only if it is incurred in the course of borrowing money. See Riviera Hotel Co. Ltd. v. M.N.R., 72 DTC 6142 (FCTD), and Neonex International Ltd. v. Her Majesty the Queen, 78 DTC 6339 (FCA). In the case at hand 24(1)
12. In order to be deductible under paragraph 20(1)(f) of the Act, the 24(1) must represent "... an amount paid in the year in satisfaction of the principal amount...". Principal amount is defined in subsection 248(1) of the Act and reads in part as follows: "... the maximum amount payable ... on account of the obligation by the issuer thereof, otherwise than as or on account of interest ...". In the case at hand 24(1) Hence, there is no principal amount for the purposes of paragraph 20(1)(f) of the Act. Furthermore, even assuming that there were a principal amount, the comments in paragraph 5 of Interpretation Bulletin IT-341R would not be relevant as it cannot be said that the 24(1) Accordingly paragraph 20(1)(f) of the Act is not applicable.
13. In our opinion, 24(1) falls within the definition of an eligible capital expenditure under paragraph 14(5)(b) and is not specifically excluded under any of subparagraphs 14(5)(b)(i) to (vi). Accordingly, a deduction may be claimed under paragraph 20(1)(b) of the Act.
We hope our opinions are helpful to you.
DirectorFinancial Industries DivisionRulings Directorate