B. Fioravanti (613) 957-2130
Attention XXXX
January 31, 1986
Dear Sir:
Re: Paragraph 20(1)(e) Income Tax Act Warrant Issue Cost
This is in reply to your letter of September 5, requesting our interpretation with respect to the applicability of paragraph 20(1)(e) of the Income Tax Act (the "Act") to a particular fact situation which, as described, appears to be a completed transaction involving a specific taxpayer. Normally, the determination of the tax consequences arising from such a case is a function of the District Taxation Office. Although such requests should be directed to the appropriate District Office, the following general comments may be of some assistance.
In Cara Operations Ltd. v. MNR (TRB) 1973 CTC 2298, the Assistant Chairman stated at page 2303 that subparagraph 11(1)(cb)(i) is a clear exception to the general rule of the non-deductibility of capital expenditures and must be treated as such. In the strict interpretation that must be placed on the wording of the exception, it seems to me that "expenses incurred in the course of issuing shares" can only mean expenses which are inherent and essential to the actual issue of the shares and this would not include expenses which are only consequential or resulting from the issue.
Accordingly, expenses (legal, accounting and underwriting costs) incurred by a company on the issue of its warrants cannot be considered an expense which is inherent or essential to the issue of shares. In our view, they do not fall within the provisions of subparagraph 20(1)(e)(i) of the Act and are therefore not deductible.
We trust that these comments will be of some help.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch