29 August 1989 Income Tax Severed Letter AC58509 - Deductibility of Donations as Business Expenses

To:      Bilingual Services and
           Resource Industries Division
         Carole Gouin-Toussaint
         Dirctor

From:    Resource Industries
           Section
         John Shaw
         957-8509

Subject: 24(1)

This is briefing memorandum for our meeting to be held August 30, 1989 with the representatives of 24(1).

Issue: 21(1)(b) and 24(1)

Facts: 24(1)

Taxpayer's Arguments: 24(1)

We, at least for the moment, concede that the prepayment penalty is an expense made or incurred for the purpose of making the disposition, but assert that the foreign exchange loss is not, as it is part of the repayment of the loan, which repayment itself, may hardly be considered a cost of disposition of property.

In support of this conclusion, we may offer the obiter comments of Hurressen, J., concurring in the result in R.V. Demers, 86 DTC 6411, at page 6413, where he stated:

"Further of a payment which would otherwise be an outlay within the meaning of a provision results in the taxpayer acquiring property with a value equal to that of the payment, it would be contrary to common sense to treat it as an outlay made "for the purpose of making the disposition".

For example, a taxpayer who as a condition of selling his shares his shares in a company repays the latter's loan to him and is given a release for it could not claim this payment as an outlay because it was not made exclusively for the purposes of the sale, but in order to extinguish the debt. The same would be true of an owner who paid real estate tax arrears when he sold his real property. In both cases, the sale would be the occasion but not the cause of the payment."

21(1)(b)

24(1) decisions in Olympia Floor & Wall Tile (Quebec) Ltée. 70 DTC 6085 and Impenco Ltd. v. M.N.R. 88 DTC 1242 are 24(1)

In those cases, the taxpayer donated amounts substantially in excess of 20% of its income to certain charities, convinced that, since the donations were made in the expectation of sales the prohibition on the deduction of those donations exceeding 20% of its income ought not to apply, and the entire amount expended ought to be deductible as a cost of doing business. (In effect, the payments were not truly charitable donations, which are amounts given without a predominant business motivation.)

21(1)(b)

The taxpayer goes on to reinforce its comments on "economic reality" by reference to the Demers case at the Federal Court level in 1983, Sherritt Gordon Mines Ltd. v. M.N.R. (1968)CTC 262, The Queen v. Bronfman Trust 87 DTC 5059, Imperial General Properties Limited 85 DTC 5045, Johns-Manville Canada Inc. v. The Queen v. Metropolitan Properties Co. (1985) 1 CTC 169, and Cyprus Anvil Mining Corp. v. The Queen (1985) 2 CTC 74, as well as Revenue's position in Interpretation Bulletins IT-417 and 95R.

21(1)(a)

The taxpayer has subsequently stated that the decisions of the Tax Court of Canada in Pollard v. M.N.R. 87 DTC 1110 supports its position. Pollard sold his residence and purchased a new one in the course of changing employment. In lieu of immediate receipt of a mortgage prepayment penalty of $6,115, the holder of the mortgage agreed to grant a mortgage on the new residence at 1 3/4% in excess of the market rate. The excess interest purportedly equalled the $6,115 prepayment penalty. In concluding that the amount in question represented a prepayment penalty, the Tax Court, citing the statement in Interpretation Bulletin IT 178R2 that mortgage prepayment penalties are a cost of selling the old residence, found for the taxpayer, but declined to comment on what portion of the amount was paid in the taxation year under objection, leaving that for the Minister and taxpayer to determine.

21(1)(b)

In conclusion, we find none of the taxpayer's arguments on the foreign exchange loss persuasive.

Section Chief Resource Industries Section Bilingual Services and Resource Industries Division Rulings Directorate