2017-0727041E5 Legal and accounting fees - aborted share purchase

Principal Issues: Will the position in paragraph 23 of IT-143R3 continue to apply in light of the legislative changes and repeal of the eligible capital property system?

Position: Yes.

Reasons: 18(1)(a), 13(35), 13(36)

Author: D'Angelo, Sandro
Section: Class 14.1, 13(34), 13(35), 13(36), 20(1)(a), 18(1)(y), 18(1)(a), 18(1)(b), 9(1)

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                                                                                                                               S. D’Angelo, CPA, CMA
July 19, 2018

Dear XXXXXXXXXX:

Re:  Legal and Accounting Fees, Paragraph 23 of IT-143R3

This is in response to your correspondence of October 11, 2017, asking our view on the income tax treatment of legal and accounting fees incurred when a purchaser aborts the purchase of shares.

Specifically, you are asking whether the Canada Revenue Agency’s (“CRA”) previous position as expressed in document 2002-0151405, wherein we provided comments with respect to an aborted attempt to acquire shares and stated that “these fees qualify as eligible capital expenditures if the taxpayer can demonstrate that the taxpayer intended to make the business of the target corporation part of a similar business that the taxpayer already operated,” will remain the same in light of the legislative changes and repeal of the Eligible Capital Property system.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

In general terms, an expenditure may be deductible in the year it was incurred to the extent that it is deductible in computing a taxpayer’s profit from a business or property under subsection 9(1) of the Act.  In addition, paragraph 18(1)(a) provides that a deduction may only be claimed for an expenditure incurred for the purpose of gaining or producing income from the business or property.  Where these conditions are satisfied, an expenditure will generally be deductible in the taxation year in which it is incurred unless the expenditure was incurred on capital account and paragraph 18(1)(b) would be applicable to deny the deduction.

Normally, legal and accounting fees incurred by a purchaser in the acquisition of shares of a corporation would be capital expenditures.  In the case of an aborted attempt to acquire shares of a corporation, the purpose test described above would not be met and these costs would not be deductible as current expenditures nor would they be considered to be eligible capital expenditures.  However, the CRA has applied the position as expressed in paragraph 23 of Interpretation Bulletin IT-143R3, Meaning of Eligible Capital Expenditures (“IT-143R3”), as follows:

“Since an outlay or expense is an eligible capital expenditure only if it is incurred for the purpose of gaining or producing income from a business, legal and accounting fees incurred in an abortive attempt to acquire shares of a corporation would normally not qualify.  Where, however, the taxpayer can demonstrate that he or she proposed to make the business of the corporation part of a similar business which the taxpayer already operated, the fees may qualify as eligible capital expenditures.”

Effective January 1, 2017, the Eligible Capital Property system was repealed and replaced with a new capital cost allowance class, Class 14.1.  We confirm that the CRA will continue the position as outlined in paragraph 23 of IT-143R3 under the new Class 14.1 rules.

We trust these comments will be of assistance to you.

Yours truly,

Katie Robinson, CPA, CA
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate

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