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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
When business assets are sold and contingent liabilities are assumed by the vendor, what is the tax effect regarding the contingent liabilities?
Position TAKEN:
An amount contingently payable for an asset does not form part of the cost of the asset until the contingency has been met.
Reasons FOR POSITION TAKEN:
Previous position taken by the Department.
5-951145
XXXXXXXXXX Franklyn S. Gillman
Attention: XXXXXXXXXX
June 9, 1995
Dear Sirs:
Re: Reserves and Contingencies
This is in reply to your letter dated April 18, 1995 wherein you requested Revenue Canada's (the "Department") position with regards to the treatment of reserves, contingencies and other "soft liabilities" in the context of the sale of a business.
In a typical situation, where a business is sold and the purchaser assumes the vendor's liabilities as part of the consideration for the assets acquired, the liabilities assumed would form part of the cost to the purchaser of the assets.
By comparison, where a business is sold and contingent liabilities of the vendor are assumed by the purchaser as part of the consideration of the sale price, it is the Department's position that there is neither a deduction to the vendor nor a cost of acquisition to the purchaser in respect of the contingent liabilities assumed. Should the contingency materialize, and the purchaser incurs an outlay as a result of it, the outlay would be made on account of capital and would then form part of the purchase price of the assets acquired.
An amount contingently payable for an asset does not form part of the cost of the asset sold until the contingency has been met: see J.L. Guay Ltée. 71 DTC 5423 (F.C.-T.D.),73 DTC 5373 (F.C.A.) 75 DTC 5094 (S.C.C.); Newfoundland Light and Power Co. Ltd. 90 DTC 6166 (F.C.A.); and Mandel 76 DTC 6316 (F.C.-T.D.), 78 DTC 6518 (F.C.A.). 80 DTC 6148 (S.C.C.).
These opinions are our interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 21 of Information Circular 70-6R2 written opinions are not advance rulings and, accordingly, are not binding on the Department.
We trust these comments will be of assistance.
Yours truly,
for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch
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