Financing expenses are often considered non-deductible capital expenditures per the general rules regarding deductions for income earned from a business or property. Certain financing expenses may be eligible for deduction over a five-year period if they qualify for treatment under paragraph 20(1)(e) of the Income Tax Act .
Paragraph 20(1)(e) may apply to certain expenses that are incurred in the course of issuing or selling securities (such as capital stock in a corporation, units in a trust, or interests in partnership or syndicate), borrowing money, or incurring, rescheduling or restructuring indebtedness. These expenses frequently include legal and accounting fees as well as other expenses, such as commissions or fees paid to salesperson, agent or dealer in securities.
This paragraph does not apply to situations where a deduction is permitted by another section of the Act. Certain amounts are also specifically excluded, such as any amount paid in respect of principal or interest on a debt obligation, contingent amounts, and any amount that is computed by reference to revenue, profit, cash flows, or similar criterion.
Certain amounts may also be fully deductible in the year incurred if it can reasonably be considered that they relate to only one year. For example, you may be required to pay an annual standby fee to maintain a loan. It can likely be argued that this amount relates only to the year incurred and is therefore fully deductible. However, a one-time fee related to a loan that with a term longer than one year will likely be subject to the five-year apportionment as it can not be argued that it relates only to one year.
Assuming paragraph 20(1)(e) applies, the expenses can be deducted equally over a five-year period with annual deductions of 20% per year. The deduction will be pro-rated if the taxation year is less than 365 days.
Financing expenses are a complicated area for income taxes. These expenses can be considered capital expenditures, non-deductible expenses, or they can be subject to the five-year apportionment per paragraph 20(1)(e) of the Act. These expenses need to be analyzed on a case-by-case basis to determine the correct tax treatment.
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