31 March 2011 Internal T.I. 2011-0291701I7

Expenses incurred by a public corporation with respect to an unsuccessful bid to acquire a public company were capital expenditures which qualified as eligible capital expenditures on the basis that there was a plan to merge the target's business with that of the taxpayer and the comments in BJ Services as to the characterization of amounts incurred in order to enhance shareholder value. However, expenses incurred with respect to a proposed business combination were deductible under s. 9. Costs incurred by the target in obtaining professional advice and communicating with shareholders also were deductible.

Expenses incurred by a public corporation with respect to an unsuccessful bid to acquire another public company were capital expenditures on the basis that there was a plan to merge with the target's business and on the basis of "CRA's long-standing position that expenditures incurred in an unsuccessful transaction will be accorded the same treatment as if the transaction had been successfully completed." Such expenses were eligible capital expenditures.

However, expenses incurred by a corporation (i) in respect of a proposed combination with another corporation, and (ii) in responding to an unsolicited takeover bid, were deductible under s. 9. Respecting the first category of expenses, CRA stated:

The proposed XXX combination would appear to have been negotiated in circumstances that are very similar to those considered by the Tax Court in BJ Services, which found that the costs were deductible in computing income under subsection 9(1). While we believe that an argument could be made that these transaction costs were on account of capital as the proposed combination represented a capital transaction relating to the structure in which XXX 's business would be carried on, such an argument is contrary to the decisions in BJ Services and International Colin Energy.

Respecting the second category of expenses, it stated:

Based on established case law, including the decisions in British Columbia Power Corp. Ltd. v. MNR 67 DTC 5258, [1968] S.C.R. 17 and Boulangerie St-Augustin Inc. v. The Queen 95 DTC 164 (TCC); affirmed by 97 DTC 5012 (FCA), the costs incurred by XXX with respect to obtaining professional advice and communicating with its shareholders concerning the XXX and XXX offers would be deductible as current expenses....

Payments made by a public company which was the target of a takeover bid in paying employees to surrender vested stock options were capital expenditures in light of Imperial Tobacco and Kaiser.