12 July 2011 Internal T.I. 2010-0366321I7 - Tax treatment of break fees received

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: A. Whether the break fees received by XXXXXXXXXX from XXXXXXXXXX under the terms of the Support Agreement should be included in XXXXXXXXXX's income or represent non-taxable capital receipts; XXXXXXXXXX

Position: A. The break fees should be included in XXXXXXXXXX 's income pursuant to section 9, paragraph 12(1)(x) or alternatively under section 14 or as proceeds of disposition of a capital property XXXXXXXXXX

Reasons: A. Surrogatum principle. Further, a Court decision describes a break fee as an inducement to a bidder in a takeover transaction; XXXXXXXXXX

							July 12, 2011

XXXXXXXXXX 						Resources Industry Section
XXXXXXXXXX  Tax Services Office		T. Harris
							(613) 957-8284

							2010-036632

XXXXXXXXXX
Treatment of Break Fee Received

We are writing in response to your memoranda of December 24, 2010 and February 11, 2011 wherein you requested our opinion with respect to the income tax treatment of certain break fees (the "Break Fee") in the amount of US$XXXXXXXXXX (CDN$XXXXXXXXXX ) received by XXXXXXXXXX in XXXXXXXXXX from XXXXXXXXXX as a result of XXXXXXXXXX 's unsuccessful bid to acquire all the outstanding common shares of XXXXXXXXXX .

While break fees are a common feature in most merger and acquisition transactions, there does not appear to be a consistent characterization of break fee receipts among taxpayers. XXXXXXXXXX

XXXXXXXXXX

2. On XXXXXXXXXX , XXXXXXXXXX 's Board of Directors authorized XXXXXXXXXX 's proposed offer ("Offer") to acquire the XXXXXXXXXX shares for XXXXXXXXXX . On the same day, XXXXXXXXXX and XXXXXXXXXX entered into an agreement (the "Support Agreement") which set out the terms and conditions on which XXXXXXXXXX would make an offer to acquire the shares of XXXXXXXXXX . XXXXXXXXXX

3. The Support Agreement also contemplated the potential payment by XXXXXXXXXX to XXXXXXXXXX of the following amounts XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX became payable if, among other things, a competing bid for XXXXXXXXXX was consummated within a set period of time. XXXXXXXXXX became payable if less than XXXXXXXXXX of the common shares of XXXXXXXXXX were tendered into the XXXXXXXXXX bid by the XXXXXXXXXX expiry date.

8. XXXXXXXXXX

9. XXXXXXXXXX

XXXXXXXXXX and XXXXXXXXXX expected to realize the $XXXXXXXXXX operating and corporate synergies within XXXXXXXXXX months following the completion of their transaction. XXXXXXXXXX

XXXXXXXXXX

13. On XXXXXXXXXX , XXXXXXXXXX announced that less than the required XXXXXXXXXX % of the XXXXXXXXXX shares had been tendered to XXXXXXXXXX 's Offer and that XXXXXXXXXX had elected to permit the Offer to expire XXXXXXXXXX . Under the terms of the Support Agreement, XXXXXXXXXX was paid by XXXXXXXXXX to XXXXXXXXXX due to the Minimum Tender Condition not having been satisfied.

14. On XXXXXXXXXX , XXXXXXXXXX successfully acquired XXXXXXXXXX % of the shares of XXXXXXXXXX that it did not already own. Accordingly, XXXXXXXXXX became payable by XXXXXXXXXX to XXXXXXXXXX .

Unless otherwise indicated, all references herein to statutory provisions are references to the Income Tax Act.

Issues

You have requested our opinion with respect to the following issues:

1. Whether the XXXXXXXXXX the Break Fee, received by XXXXXXXXXX from XXXXXXXXXX under the terms of the Support Agreement, represent.

a) Income under subsection 9(1),

b) Amounts to be accorded the same tax treatment as the item for which it was intended to compensate pursuant to the surrogatum principle,

c) Eligible capital amounts,

d) Income under paragraph 12(1)(x),

e) Capital Gains, or

f) Non-taxable capital receipts.

2. XXXXXXXXXX

Taxpayer's Position

Break Fee received from XXXXXXXXXX

XXXXXXXXXX

Audit's Position

Break Fee received from XXXXXXXXXX

Your memorandum describes the purpose of break fees in mergers and acquisitions as follows:

Break fees typically provide compensation to an initial bidder for its outgoing time and effort, out-of-pocket expenses, internal costs and opportunity cost if an event occurs which prevents the bid from completing. Internal costs include executive time spent on the transaction. Opportunity costs include the opportunity cost of diversion of the bidders' attention from its own business or the pursuit of other acquisition opportunities. Opportunity costs such as these are typically difficult to define and are most impossible to quantify.

As noted above the underlying purpose of the transaction was to combine the business operations of XXXXXXXXXX and XXXXXXXXXX so as to achieve operating synergies and efficiencies, enhance future growth and be better positioned to compete for acquisition opportunities as the XXXXXXXXXX industry continued to consolidate; which would in turn maximize shareholder value. The resultant revenue growth and cost savings from operating synergies would be reflected in the earnings of the combined company. Consequently, you believe that by applying the Tax Court of Canada's analysis in BJ Services Company Canada v. The Queen, 2004 DTC 2032 (TCC) ("BJ Services") the Break Fee received from XXXXXXXXXX as a result of XXXXXXXXXX 's unsuccessful takeover bid for XXXXXXXXXX could be viewed as ancillary business income to XXXXXXXXXX under subsection 9(1) of the Act.

Alternatively, as break fees typically provide compensation to an initial bidder for its outgoing time and effort, out-of-pocket expenses, internal costs and opportunity cost if an event occurs which prevents the bid from being completed, you believe that the surrogatum principle should apply to the characterization of the break fee for tax purposes. Based on the jurisprudence summarized in Appendix II to your memorandum, you believe that pursuant to the surrogatum
principle, the tax treatment to be accorded to a settlement payment or damages should parallel that of the item for which the payment is intended to compensate.

XXXXXXXXXX

Considering the general nature of break fees in merger and acquisition transactions, and the description of the payments under the Support Agreement, you believe it is reasonable to conclude that the true character of the XXXXXXXXXX to XXXXXXXXXX , was compensation for transaction costs (wasted expenditures) it had incurred and opportunity costs due to the termination of the Support Agreement.

You believe that the opportunity costs suffered by XXXXXXXXXX as a result of the failure of the Offer would include the foregone anticipated benefits the combined company would realize through greater operating efficiencies and corporate synergies, in terms of future revenue growth, reduced operating costs, enhanced financial and other resources that would position the combined company to better compete in the XXXXXXXXXX business than either company could do alone. Consequently, to the extent that the Break Fee exceeded the transaction costs incurred by XXXXXXXXXX , you believe it would be reasonable to attribute the excess amount to the forgone annual operating and corporate cost savings of $XXXXXXXXXX expected to be realized in the near term. Since the operating and corporate cost savings, if realized, would be reflected in XXXXXXXXXX 's profit under subsection 9(1) of the Act, you are of the view that, pursuant to the surrogatum principle, the portion of the Break Fee that was paid to compensate for the opportunity cost associated with the foregone cost savings would also be on account of income and be included in income under subsection 9(1) in the year of receipt.

Similarly, the tax treatment of the Break Fee intended to compensate for the transaction costs incurred by XXXXXXXXXX in respect of its takeover bid for XXXXXXXXXX would parallel the tax treatment of the related costs.

Our Comments

Break Fee received from XXXXXXXXXX

As noted in your memo, since the tax treatment of a break fee receipt has not been considered by the courts, it is necessary to review the various provisions of the Act and principles established under case law that may apply to include this amount in the recipient's income. In any event, the characterization of a break fee receipt for income tax purposes may differ from case to case, depending on the particular facts of each case.

Section 9

We are in agreement with your position that the Break Fee was intended to compensate XXXXXXXXXX for transaction costs it had incurred and opportunity costs it had suffered due to the termination of the Support Agreement. Since expenses incurred for transaction costs and opportunity costs are on current account, pursuant to the surrogatum principle, it is arguable that the Payments should be included in XXXXXXXXXX 's income under subsection 9(1).

We also agree with your view that the underlying purpose of the transaction was to maximize shareholder value. Consequently, the Payments received from XXXXXXXXXX as a result of XXXXXXXXXX 's unsuccessful takeover bid for XXXXXXXXXX could be viewed as ancillary business income to XXXXXXXXXX under subsection 9(1).

Paragraph 12(1)(x)

For purposes of paragraph 12(1)(x), we believe that the Break Fee

(a) was received by XXXXXXXXXX in the course of earning income from a business or property and that XXXXXXXXXX paid the Break Fee in the course of earning income from its business or property,

(b) the Break Fee may reasonably be considered to have been received as "any other form of inducement" or "as a refund, reimbursement, contribution or allowance or as assistance" in respect of an outlay or expense made by XXXXXXXXXX , and

(c) a Break Fee is not a prescribed amount within the meaning of section 7300 of the Regulations.

XXXXXXXXXX

In our view, it is quite evident from the rationale for the acquisition XXXXXXXXXX that XXXXXXXXXX 's efforts to acquire the shares of XXXXXXXXXX were for the purpose of earning income from its business (to the extent that the operations of XXXXXXXXXX were to be merged with those of XXXXXXXXXX ) or from property (being dividends on the shares of XXXXXXXXXX ). Furthermore, in paragraph 36 of its decision in BJ Services the Tax Court stated "It is a basic
common sense approach to view maximizing share price as inextricably interwoven with the business of any company, whether that be public or otherwise." Consequently, in our opinion the Payments were received by XXXXXXXXXX "in the course of earning income from a business or property" as required under paragraph 12(1)(x).

With respect to whether the Payments may reasonably be considered to have been received as "any other form of inducement" or "as a refund, reimbursement, contribution or allowance or as assistance" in respect of an outlay or expense made by XXXXXXXXXX for the purpose of paragraph 12(1)(x), we note that in paragraph 50 of the decision in Re CW Shareholdings Inc. v. WIC Western International Communications Ltd. et al. 39 O.R. (3d) 1998 p. 755, Blair J. describes break fees as follows:

A break fee-or "bust-up fee", as it is sometimes called is a payment employed by the target corporation for the purpose of enticing another competitive bidder to enter the fray. It is paid to the competitive bidder when its bid fails or is superseded by a better offer. Partly, the inducement is paid to compensate the bidder being wooed for its time, effort, costs and lost opportunity in putting forward the opposing bid; partly the break fee is purely and simply bait to lure another party into the arena in order to generate a free-for-all for the prize. Such fees are effective inducements, and they are common in takeover bid situations and accepted as proper techniques in appropriate circumstances. [bold added]

Similarly, the Five year review committee final report reviewing the Securities Act (Ontario) published May 29, 2003, [available at http://www.fin.gov.on.ca/en/publications/2003/5yrsecuritiesreview1.html] includes the following comments relating to break fees in section 18.3 of Part 5 of the report prepared for the Ontario Minister of Finance:

Break fees are fees which are negotiated between a take-over bid target and a bidder as part of the inducement for the bidder to make an offer to acquire the shares of the target. The fee is paid to the bidder if the board of directors of the target recommends accepting a competing offer. Often, break fees are in the amount of two to four per cent of the value of the target company, thereby adding two to four per cent to the cost of acquisition of the target company by a different, and successful, bidder.

Bidders who negotiate break fees argue that such fees are a necessary inducement for them to make an offer. Opponents of break fees argue they are an unjustified use of the target's asset (being cash) to prefer one bid over another. [bold added].

XXXXXXXXXX

We believe that the above-noted comments support the position that the Payments represented an inducement for XXXXXXXXXX to make the Offer to acquire the shares of the target. In addition, a portion of the Payments may be considered a reimbursement of an outlay or expense incurred by XXXXXXXXXX . In this regard, Denault J. made the following comments on the meaning of "reimbursement" for the purposes of paragraph 12(1)(x) in Westcoast Energy Inc. v. The Queen 91 DTC 5334 at page 5341:

The word reimbursement in the ordinary sense, as defined in the Shorter Oxford English Dictionary, is as follows:

Reimburse - to repay or make up to (a person) the sum expended: to repay, recompense (a person).

Reimbursement - the act of reimbursing, repayment.

Blacks Law Dictionary also defines the word reimburse as: "to pay back, to make restoration, to repay that expended; to indemnify or make whole".

Examples of the word reimbursement in different legal relationships were cited. First, there is a compulsory payment. This is a situation where a person has been compelled by law to pay and pays money for which another is ultimately liable. The payer can make a claim for reimbursement from the latter individual. Second, there is the example of where a person makes repairs or improvements to property which he believes to be his own. He can claim a reimbursement against the owner of the property. Third, there is the situation where a person, such as a guarantor, discharges more than his proportionate part of a debt. He can take action for reimbursement against the co-guarantors. Finally, in the law of agency, a principal is liable to reimburse his agent for reasonable expenses incurred in an emergency, even if the agent exceeded his actual authority.

Based on the above analysis, I accept these examples as an accurate reflection of what the word means and the meaning that Parliament intended to capture by enacting section 12(1)(x). The budget debates referred to similar situations, such as the landlord/tenant leasehold improvements.

In all of the examples of the word reimbursement, there exists a flow of benefits between the respective parties. The person who benefits is under a legal obligation to pay back the amount expended.

These comments were affirmed by the Federal Court of Appeal in 92 DTC 6253.

We agree with your view that the XXXXXXXXXX represents a reimbursement, contribution or assistance with respect to expenses incurred by XXXXXXXXXX in making the Offer.

Consequently, it is our opinion that the Payments should be included in XXXXXXXXXX 's income pursuant to paragraph 12(1)(x) except to the extent that the Payments were

(a) otherwise included in computing XXXXXXXXXX 's income, or deducted in computing, for the purposes of the Act, any balance of undeducted outlays, expenses or other amounts, for the year or a preceding taxation year, or

(b) XXXXXXXXXX elected under subsection (2.2) to reduce the amount of the outlay or expense.

Capital Gain or Eligible Capital Amount

We have also considered whether the Payments can be considered to give rise to a capital gain or an eligible capital amount. In this regard, XXXXXXXXXX has submitted that the Payments are not included in its income under subsection 14(1) because, inter alia, they

(a) were not received by XXXXXXXXXX as a result of a "disposition" as required by element E of the definition "cumulative eligible capital" in subsection 14(5),

(b) were not received "in respect of a business carried on or formerly carried on" by XXXXXXXXXX as required by element E of the definition "cumulative eligible capital" in subsection 14(5), and

(c) do not meet the "mirror image" test as set out in section 14 and the relevant jurisprudence.

XXXXXXXXXX also submits that the Payments do not give rise to capital gains or taxable capital gains to XXXXXXXXXX because, inter alia, the Payments did not result from the disposition of any property as required by paragraphs 39(1)(a) and 40(1)(a).

In Canada v. Golden, [1986] 1 S.C.R. 209, Estey J. on behalf of the majority of the Supreme Court of Canada made the following comments in paragraph 7, after quoting the definition of "property" in subsection 248(1):

... This extremely broad definition of property leaves very little in the "non-property" classification. It would appear to include a contract right and might in some circumstances include a right to assert a covenant by a vendor to deliver "know-how"....

[bold added.]

Also, in Manrell v. Canada 2003 DTC 5225, Sharlow, J. stated in paragraphs 24 and 25:

[24] Professor Ziff, in Principles of Property Law, 3 rd ed (Scarborough: Carswell, 2000), says this about property (emphasis added) (at page 2):

Property is sometimes referred to as a bundle of rights. This simple metaphor provides one helpful way to explore the core concept. It reveals that property is not a thing, but a right, or better, a collection of rights (over things) enforceable against others. Explained another way, the term property signifies a set of relationships among people that concern claims to tangible and intangible items.

[25] It is implicit in this notion of "property" that "property" must have or entail some exclusive right to make a claim against someone else.

Based on these principles, it is our opinion that the rights that XXXXXXXXXX had under the Amended Support Agreement would be considered property for purposes of the Act as those rights were enforceable against XXXXXXXXXX .

In RCI Environnement Inc. v. The Queen 2008 DTC 4982, Archambault J. considered the conclusions of the Supreme Court of Canada in Canada v. Compagnie Immobilière BCN, 79 DTC 5068, relating to the terms "disposition" and "proceeds of disposition" before reaching the following conclusion in paragraph 72 of his decision:

Accordingly, the rights created by the non-competition agreements were, for the purposes of sections 38, 39 and 40 of the Act, property referred to in subsection 248(1) of the Act, and cancellation of those rights constitutes a disposition for the purposes of those sections and of section 14 of the Act.

Based on this reasoning we believe that the Payments received by XXXXXXXXXX may be considered as proceeds of disposition of its rights under the Amended Support Agreement for purposes of sections 38, 39 and 40 of the Act. Support for this position may be found in the article "Tax Treatment of Transaction Costs" by Nik Diksic and Christian Desjardins published in Report of Proceedings of Fifty-Eighth Tax Conference, 2006 Tax Conference (Toronto: Canadian Tax Foundation, 2007), 38:1-37, at page 38 which concludes:

In our view, the most reasonable characterization of a break fee is as proceeds of disposition of the taxpayer's rights under a support agreement. The definition of "property" in the Act is certainly broad enough to capture such contractual rights, and because these rights relate to a share acquisition (being a capital transaction) they should qualify as capital property. This conclusion is consistent with the recent decision in Valley Equipment [2006 DTC 3593], where the Tax Court held that the definition of "property" in subsection 248(1) was broad enough to include the appellant's commercial rights under a dealership agreement. The Tax Court found that court-awarded damages received by the appellant as a result of the cancellation of the dealership agreement were proceeds of disposition of a capital asset - namely, the appellant's rights under the dealership agreement. A similar analysis should apply to a break fee: it is received as proceeds of disposition of a capital property (the purchaser's contractual rights under the support agreement) and therefore should be treated as a capital gain.

However, since, by virtue of subparagraph 39(1)(a)(i), a capital gain does not include any gain arising from the disposition of an eligible capital property it is necessary to consider whether subsection 14(1) may apply to the Payments. With respect to the possible application of subsection 14(1), the description of E in the definition "cumulative eligible capital" in subsection 14(5) was amended by subsection 3(6) of the Budget Implementation Act, 2006, No. 2 applicable to amounts that become receivable on or after May 2, 2006. This amendment eliminated the requirement that the amount be received as a result of a disposition and the mirror-image rule. However, XXXXXXXXXX has elected pursuant to subsection 3(10) of the Budget Implementation Act, 2006, No. 2 such that the amended version of E in the definition "cumulative eligible capital" not apply to the receipt of the Payments.

As noted above, we believe that for the purposes of sections 14, 38, 39 and 40 the Payments may be considered to have been received by XXXXXXXXXX as proceeds for the disposition of property, being the rights that XXXXXXXXXX had under the Amended Support Agreement. Also, as discussed under paragraph 12(1)(x), in paragraph 36 of its decision in BJ Services the Tax Court stated "It is a basic common sense approach to view maximizing share price as inextricably interwoven with the business of any company, whether that be public or otherwise." Consequently, as discussed above we believe that the Payments were received by XXXXXXXXXX "in respect of a business carried on" by it for purposes of the description of E in the definition "cumulative eligible capital". The "mirror image" test was described as follows by Archambault, J. in paragraph 77 of the decision in RCI Environnement:

In my opinion, the text is clear and unequivocal in this case. In the context of item E of the definition of cumulative eligible capital, the consideration in question is what the "taxpayer" gave in order to receive the payment to which item E refers. In this case, what RCI and CTVNS (and also SEC), the "taxpayers", gave as consideration for the $12 million were the rights they held under the non-competition agreements. Now, if the taxpayer (and not the parties that paid the "amount") had made a "payment" "for that consideration", would "the payment" have been an eligible capital expenditure "of the taxpayer"? That is, if RCI and CTVNS had paid $12 million for that consideration, the "rights" created by the non-competition agreements, would that expenditure have been an eligible capital expenditure of RCI and CTVNS? Clearly the question must be decided from the perspective of the taxpayer, and not of the payer of the amount. If these two companies had acquired the rights created by the non-competition agreements after 1971, this would, in my opinion, have been an eligible capital expenditure. The amounts would not have been deductible as current expenses in computing their income, having regard to the prohibition in paragraph 18(1)( b) of the Act regarding capital expenditures. It would have been an eligible capital expenditure because obtaining the non-competition agreements would have procured an enduring advantage for their business; the expense would have been incurred in order to earn income from their business and none of the exceptions provided in the definition of "eligible capital expenditure" in subsection 14(5) of the Act would have applied.

This decision rendered by Archambault, J. is not consistent with the majority decision of the Federal Court of Appeal in The Queen v. Goodwin Johnson (1960) Ltd., [1986] 1 CTC 448, which found that the nature of the payment in the hands of the recipient was to be determined by the nature of the payment in the hands of the payer. However, the reasoning of Archambault, J. in RCI Environnement was upheld by the decision of the Federal Court of Appeal [2008 FCA 419] in which Noel, J.A. stated the following at paragraph 51:

In my opinion, the opinion expressed by the TCC judge is convincing. Beyond the statutory language, which is plain and clear on the specific point we are concerned with, no logic can justify that the tax treatment of a taxpayer should be determined according to the circumstances relating to another taxpayer. In my view, the question is sufficiently clear to allow us to say that the majority opinion expressed by this Court in Goodwin Johnson, cited above, according to which the quality of the amount should be analyzed on the basis of the payer, is no longer good law (see Miller v. Canada (A.G.), 2002 FCA 370, paragraphs 8 to 10).

Noel, J.A. also made the following comments concerning the decision in The Queen v. Toronto Refiners and Smelters Limited, 2002 FCA 476, in paragraph 46 of the decision:

Contrary to the arguments of counsel for RCI (2006), I do not believe that that decision means that the analysis should be made from the perspective of the payer in all instances. In that case, the Court was dealing with an exceptional situation, the payment in question having been made by a public authority under an enactment, in a non-business context. In order to consider the actual context of the payment, the Court had to keep in mind that the payment was issued by a public authority, namely, the City of Toronto, exercising a power of expropriation ( Toronto Refiners, cited above (paragraph 18)). For all intents and purposes, this made the question underlying item E inapplicable, because no one would pay money to acquire the right to be expropriated.

Since, as stated previously, it is our view that XXXXXXXXXX may be considered to have received the Payments as proceeds for the disposition of its rights under the Amended Support Agreement; the "mirror image" test would require a determination of whether if XXXXXXXXXX had made a payment to acquire those rights that payment would have been an eligible capital expenditure. Since the rights of XXXXXXXXXX under the Amended Support Agreement related to its attempt to acquire the shares of XXXXXXXXXX , the hypothetical payment by XXXXXXXXXX to acquire these rights would have been on capital account. To the extent that XXXXXXXXXX had succeeded in acquiring the XXXXXXXXXX shares this payment should be treated as a cost of acquiring the shares; however, since XXXXXXXXXX was not successful, the payment could be considered to be an eligible capital expenditure to the extent that it may be considered to relate to the business carried on by XXXXXXXXXX . As XXXXXXXXXX 's attempted acquisition of the XXXXXXXXXX shares was undertaken in an attempt to maximize value to the XXXXXXXXXX shareholders, the decision in BJ Services would support an argument that the expenditure would be related to the business carried on by XXXXXXXXXX . Consequently, we believe that an argument may be made that the Payments received by XXXXXXXXXX represent an amount described in item E of the definition "cumulative eligible capital" which should be included in XXXXXXXXXX 's income under subsection 14(1).

Finally, it is necessary to consider whether proposed subsection 56.4(2) could apply to the Payments. The most recent version of this proposed subsection was released by the Department of Finance on July 16, 2010 in Legislative Proposals to Amend the Income Tax Act and Related Legislation to Effect Technical Changes and to Provide for Bijural Expression in that Act (the "Proposals").

The current version of proposed subsection 56.4(2) provides that:

There is to be included in computing a taxpayer's income for a taxation year the total of all amounts each of which is an amount in respect of a restrictive covenant of the taxpayer that is received or receivable in the taxation year by the taxpayer or by a taxpayer with whom the taxpayer does not deal at arm's length (other than an amount that has been included in computing the taxpayer's income because of this subsection for a preceding taxation year or in the taxpayer's eligible corporation's income because of this subsection for the taxation year or a preceding taxation year).

Although the term "restrictive covenant" is defined in proposed subsection 56.4(1), the proposed coming-into-force provisions in paragraph 27(3)(a) of the Proposals provides that for a restrictive covenant granted by a taxpayer before November 9, 2006, the definition of "restrictive covenant" is to be read as follows:

"restrictive covenant", of a taxpayer, means an agreement entered into, an undertaking made, or a waiver of an advantage or right by the taxpayer, whether legally enforceable or not, that affects, or is intended to affect, in any way whatever, the acquisition or provision of property or services by the taxpayer or by another taxpayer that does not deal at arm's length with the taxpayer, other than an agreement or undertaking

(a) to dispose of the taxpayer's property; or

(b) in satisfaction of an obligation described in section 49.1 that is not a disposition.

In addition, proposed paragraph 56.4(3)(b) provides that subsection 56.4(2) will not apply to an amount received or receivable by a particular taxpayer in a taxation year in respect of a restrictive covenant granted by the particular taxpayer to another taxpayer (referred to in this subsection and subsection (4) as the "purchaser") with whom the particular taxpayer deals at arm's length (determined without reference to paragraph 251(5)(b)), if

(b) the amount would, if this Act were read without reference to this section, be required by the description of E in the definition "cumulative eligible capital" in subsection 14(5) to be included in computing the particular taxpayer's cumulative eligible capital in respect of the business to which the restrictive covenant relates, and the particular taxpayer elects in prescribed form to apply this paragraph in respect of the amount.

In our opinion the definition of a restrictive covenant as described above is broad enough to include the Amended Support Agreement, which is an agreement entered into by XXXXXXXXXX "that affects, or is intended to affect, in any way whatever, the acquisition" of the XXXXXXXXXX shares by XXXXXXXXXX . Consequently, the Payments could be included in XXXXXXXXXX 's income pursuant to proposed subsection 56.4(2) unless the conditions described in proposed paragraph 56.4(3)(b) are satisfied.

XXXXXXXXXX

We trust that these comments will be of assistance.

Yours truly,

Fiona Harrison, C.A.
Manager
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch