Rio Tinto Alcan – Tax Court of Canada finds that investment dealer fees incurred respecting the advisability of making hostile takeover were fully deductible under s. 9 and 20(1)(bb) – and $17M in legal fees were deductible under s. 20(1)(cc)

Hogan J articulated a distinction between (currently deductible) “expenses linked to [board] oversight [,which] are current expenses since they relate to the management of the process of producing income of the corporation,” and (capital-account) “expenses incurred in the course of implementing a transaction leading to the acquisition of capital property.” Accordingly, he found that the substantial portion of investment dealer fees incurred by the Alcan board that represented input to its decision to launch a hostile bid for a French public company (i.e., 65% of the Morgan Stanley fee and 35% of the Lazard Frères fee) was currently deductible, whereas the balance of the fees relating to assistance in the bid was a capital expenditure and addition to the ACB of the acquired shares. The same fees also were fully deductible in the alternative under s. 20(1)(bb) as being fees relating to advice on the advisability of acquiring the shares of the target (Pechiney).

The same principles applied to investment dealer fees incurred respecting a subsequent butterfly spin-off transaction, so that the portion of Lazard Frères fees that related to advice on various divestiture options up to the time of the final board decision to effect a butterfly spin-off was fully deductible. The alternative deductibility of these same fees under s. 20(1)(bb) was based on the proposition that the butterfly mechanics entailed the sale (on a rollover basis) of the shares of the Opco in question to the new public company (Novelis) in consideration for the acquisition of (subsequently redeemed) preferred shares of Novelis – so that the fees related to advice culminating in the sale or purchase of shares, as required by s. 20(1)(bb). The balance of the Novelis fees (including professional fees) were deductible as disposition expenses under s. 40(1)(a).

$19M in fees paid to a French lobbyist firm related only to smoothing the Pechiney bid and were capital expenditures (i.e., ACB additions).

Legal fees of around $17M incurred in getting various regulatory (e.g., competition, securities) approvals for the Pechiney takeover were fully deductible under s. 20(1)(cc).

As noted, the portions of the fees on capital account which were not deductible under s. 20(1)(cc) were additions to the cost of the Pechiney shares (or s. 40(1)(a) disposition expenses incured in the butterfly) rather than being eligible capital expenditures. S. 20(1)(e) was not sufficiently advanced in the Alcan Notice of Objection and, in any event, Alcan did not provide any evidence as to how the fees incurred on capital account should be allocated between the cash and share consideration for its Pechiney bid.

Neal Armstrong. Summaries of Rio Tinto Alcan Inc. v. The Queen, 2016 CCI 172 under s. 18(1)(a) – legal fees, s. 20(1)(g), s. 20(1)(bb), s. 20(1)(cc) and s. 14(5) – eligible capital expenditure.