Rio Tinto Alcan – Federal Court of Appeal finds that fees incurred by a public board in determining to make a bid, as contrasted to implementation, were currently deductible
Pelletier JA confirmed the distinction between fees relating to acquisition and divestiture transactions of the taxpayer (“Alcan”) that were “incurred as part of Alcan’s decision-making process” (“oversight expenses”) and fees that “were incurred in the course of putting into effect Alcan’s decision once it had been made” (“implementation costs”). Accordingly, he confirmed Hogan J’s finding 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, thus, an addition to the adjusted cost base of the acquired shares). $19M in fees paid to a French lobbyist firm, whose purpose “was to facilitate the implementation of the Pechiney transaction by heading off possible political and public relations issues which might derail the transaction,” also fell into the implementation cost category, and were capital expenditures.
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.
Pelletier JA also confirmed Hogan J’s finding that the same oversight costs that were the applicable portion of the investment dealer fees would also have qualified for deduction under s. 20(1)(bb). This entailed accepting the proposition that fees incurred in connection with the advisability of acquiring or spinning-off a whole company qualified as being paid for “advice as to the advisability of purchasing or selling a specific share … of the taxpayer.”
Neal Armstrong. Summaries of Canada v. Rio Tinto Alcan Inc., 2018 FCA 124 under s. 18(1)(b) – capital expenditure v. expense – oversight and investment management, s. 20(1)(bb) and s. 20(1)(g).