R & S Industries – Federal Court appears to interpret a s. 97(2) drop-down agreement as preventing a re-allocation of boot to avoid gain

An agreement for the drop-down under s. 97(2) of assets by the taxpayer (R & S) to a subsidiary LP specified that the elected amounts in a joint s. 97(2) election, and the respective portions of the Purchase Price allocated to the transferred assets, would be the minimum agreed amounts permitted under the Act, “provided …that in respect of the Goodwill, the elected amount shall, unless otherwise agreed be equal to $2,502,600.” The reasons for judgment are unclear, but CRA apparently reassessed on the basis that the election form effectively allocated excess boot to the non-goodwill assets, so that gain was required to be recognized under the excess boot rules. R&S then sought to amend the election, apparently (although again this is unclear) to re-allocate this excess boot to the goodwill (which might have produced a better result as the stipulated $2.5M agreed amount presumably was above the goodwill’s cost amount).

When CRA rejected the request for an amended election, 15 months passed before R & S sought judicial review of this decision in the Federal Court. One of the grounds for refusing an extension of the normal 30-day deadline for this application was that the application lacked substantive merit. Diner J appears to have interpreted the above clause, which fixes the elected amount for the goodwill at $2.5M “unless otherwise agreed,” as preventing the boot from being reallocated to the goodwill.

Neal Armstrong. Summaries of R & S Industries Inc. v. MNR, 2016 FC 275 under Federal Court Act, s. 18.1(2) and ITA s. 97(2).