Lockwood Financial – Tax Court of Canada finds that shares received on a deferred basis from a successor of a client were fee income in the year of entitlement to receive

A broker (Lockwood) whose business included brokering deals for junior resource companies earned an up-front fee for brokering a farm-in deal for a client (LEO) in 2010. Its fee included a component that was payable in the form of 833,333 shares of LEO (which the payment agreement stated had a “deemed value” of $250,000 in total) when LEO had earned an interest in the subject resource property by having made the targeted exploration or development expenditures. However, in June 2011, LEO was taken over by a second company (AOI - which happened to be the other party to the farm-in deal) under a plan of arrangement. Lockwood brought an action to receive shares of AOI (based on the exchange ratio under the plan of arrangement) in lieu of the promised shares of LEO, and in June 2012, it was agreed that it would receive a smaller number of shares of AOI in full satisfaction of its claim. Lockwood disposed of these shares during the balance of the same (2012) taxation year.

Lockwood submitted that this fee component should have been recognized by it in its 2010 rather than 2012 taxation year in the amount of $250,000 and that the excess of the proceeds received by it in 2012 over this amount was a capital gain. St-Hilaire J instead found that:

• This fee did not become receivable, and was not to be recognized as income, in 2010, as “its right to receive this compensation cannot be said to have been ‘absolute and under no restriction’” in 2010.
• Had it been received, the payment of the LEO shares would have been a payment to Lockwood for services rendered and, hence, would have been business income.
• Since the AOI shares received in 2012 under the settlement replaced the LEO shares, the AOI shares, valued on the settlement date, were received for services rendered, so that such value was business income to Lockwood in its 2012 taxation year.
• This amount recognized as the consideration for Lockwood’s services “thus becomes the adjusted cost base of the AOI shares received in 2012. That is the amount that the taxpayer gave up to acquire the shares”.
• Thus, the proceeds for the AOI shares received in excess of that ACB was a capital gain.

Neal Armstrong. Summaries of Lockwood Financial Ltd. v. The Queen, 2020 TCC 128 under s. 12(1)(b) and s. 54 – ACB.