What are the tax implications of the convertible debenture for both Fort Technology and Jeffs’ Brands?

Tax implications – Fort Technology

• Interest expense: Fort will be paying 10 % annual interest on the CAD 5 m debenture. Under Canadian tax law the interest cost is fully deductible, reducing Fort’s taxable income for the two‑year life of the instrument. Because the interest is paid quarterly, Fort can realize a step‑down in its effective tax rate each quarter, which should improve its post‑tax cash‑flow profile.
  
• Conversion to equity: When the holder elects to convert the principal into Fort’s Units, the transaction is treated as a capital contribution rather than a taxable distribution. No gain or loss is recognized at conversion, and Fort does not incur a dividend‑or‑capital‑gain tax charge. However, the conversion will increase Fort’s equity base and dilute existing shareholders (including Jeffs’ Brands), which may affect the company’s future earnings per share and the tax basis of those shares.
  
• Withholding tax on interest: If the debenture is held by a non‑resident (e.g., Jeffs’ Brands), Fort must withhold Canadian non‑resident tax on the interest payments unless a treaty‑reduced rate applies. This creates a cash‑outflow that must be factored into Fort’s net‑interest cost calculations.

Tax implications – Jeffs’ Brands

• Interest income: Assuming Jeffs’ Brands (or an affiliate) is the debenture holder, the 10 % quarterly interest is taxable in the jurisdiction where Jeffs’ Brands reports earnings (e.g., the United States). The interest will be reported as ordinary income, subject to corporate tax at the U.S. rate, and any Canadian withholding tax can be claimed as a foreign‑tax credit.
  
• Potential capital‑gain on conversion: If Jeffs’ Brands converts the CAD 5 m principal into Fort Units, the conversion is a tax‑free exchange for the holder, but the newly‑acquired Fort shares will have a cost‑basis equal to the fair‑market value of the debenture at conversion. Future appreciation of those shares will generate a capital gain (or loss) for Jeffs’ Brands, taxed at the applicable U.S. capital‑gain rates when the shares are sold.
  
• Inter‑company financing rules: Because Jeffs’ Brands owns ~75 % of Fort, the debenture is effectively an inter‑company loan. Transfer‑pricing and thin‑capitalisation rules may require the interest rate to be at arm’s length; otherwise, the interest deduction could be limited for Fort, and the interest income could be re‑characterised as a dividend, triggering additional tax on Jeffs’ Brands.

Trading take‑aways

• Fort’s after‑tax cash‑flow should be stronger than the headline 10 % interest cost suggests, but monitor the net‑interest expense after accounting for Canadian withholding tax.
  
• Jeffs’ Brands will see a modest boost to pre‑tax earnings from interest income, but the real upside (or downside) lies in the equity position it will acquire if conversion occurs—future capital‑gain tax will be a key driver of total return.
  
• Anticipate a conversion‑risk premium in Fort’s bond pricing; the market will price the debenture higher if the conversion is likely, reflecting the tax‑efficient benefit of receiving equity rather than taxable interest. Traders can exploit this by taking a long position in Fort’s convertible debenture (or the underlying equity) while hedging the interest‑rate exposure, and by watching for any tax‑regime changes that could alter the effective yield for either side.