Section 14

Subsection 14(1) - Eligible capital property — inclusion in income from business

Administrative Policy

6 June 1994 External T.I. 5-933716 -

Where on the sale of the business of a partnership of three equal partners (two individuals and a corporation), $360,000 is received for goodwill in respect of which the partnership has never deducted cumulative eligible capital amounts, the corporation will add $30,000 to its capital dividend account.

26 September 89 T.I. (February 1990 Access Letter, ¶1098)

A taxable capital gain pursuant to s. 14(1)(a)(v) is not considered business income, and therefore does not constitute earned income for purposes of ss.63(3)(b) and 146(1)(c).

Articles

Alison Spiers, "ECP Planning: Some Practical Considerations", Canadian Tax Focus, Vol. 6, No. 4, November 2016, p 1

a purported transfer of goodwill or knowhow separately from the related business may not be effective

Given a judicial view that goodwill is inseparable from the business to which it adds value, it would appear that the accrued gain on goodwill cannot be realized apart from a disposition of the business.

Knowhow might be considered to have been disposed of only if the transferor can no longer avail itself of the knowledge in question—for example, where it sells the business to which the knowledge relates. An exception may exist if the knowhow is of a type that can be clearly documented and separated from the employees who developed it.

Subsection 14(3) - Acquisition of eligible capital property

Administrative Policy

15 January 1996 External T.I. 5-952799 -

Where an eligible capital property has been transferred by a taxpayer ("A") to a non-arm's length person ("B"), the grind to B under s. 14(3) should be reversed on a subsequent disposition of the property to another person ("C") for proceeds exceeding the eligible capital expenditure, regardless of whether the transfer to C is an arm's length or a non-arm's length disposition.

Subsection 14(5) - Definitions

Cumulative Eligible Capital

Cases

RCI Environnement Inc. v. Canada, 2009 DTC 5940, 2008 FCA 419

A lump sum received by the taxpayer in consideration for the cancellation of a non-competition agreement that it previously had received in connection with an acquisition of a business as a going concern represented proceeds of "disposition" on general principles given that the agreement was extinguished, and also was received on capital account given that (from the perspective of the taxpayer) an acquisition of a non-competition agreement in connection with its business would have been on capital account.

"The majority opinion expressed by this Court in Goodwin Johnson ... according to which the quality of the amount should be analyzed on the basis of the payer, is no longer good law ..." (para. 51).

Canada v. Toronto Refiners and Smelters Ltd., 2003 DTC 5002, 2002 FCA 476

The taxpayer received pursuant to the Expropriation Act (Ontario) $3 million in respect of the acquisition of its land and building by the City of Toronto and a further $9 million from the City in respect of damages occasioned as a result of its inability to relocate its business following the acquisition.

After noting that, in the context of s. 14, "'consideration' ... must be understood as the thing that the recipient of a payment gives in exchange for the payment", Sharlow J.A. found that the consideration given by the taxpayer for the $9 million payment was the release of any claim by it for compensation for the destruction of the goodwill of its business, and that under the mirror image rule the amount was not an eligible capital amount because the expropriation was effected for civic purposes rather than for the purposes of producing profit, and an expenditure made by the taxpayer for this purpose would not qualify as an eligible capital expenditure.

Words and Phrases
consideration

Teleglobe Canada Inc. v. R., 2002 DTC 7517, 2002 FCA 408

In connection with a privatization transaction and at a time that it was still owned by the federal Crown, the taxpayer purchased assets for a stipulated purchase price that was less than the price at which an arm's length purchaser had committed (pursuant to the same agreement under which the asset sale occurred) to purchase the common shares of the taxpayer. Such purchase price excess was reported for income tax purposes by the taxpayer as the cost of cumulative eligible capital (i.e., goodwill).

The Court indicated (at p. 7524) that:

"Absent factors which would make the transaction impeachable, the agreement of the parties determines the cost to the corporation of issuing shares in exchange for property",

and that

"The cost to the Appellant of issuing shares as part consideration for the assets ... is the amount agreed between the parties, as evidenced by the stated capital of the common shares in the Appellant".

Pe Ben Industries Co. Ltd. v. The Queen, 88 DTC 6347, [1988] 2 CTC 120 (FCTD)

A payment made by Northern Alberta Railway ("NAR") to the taxpayer as compensation to the taxpayer for the termination by NAR of a major contract for the trucking by the taxpayer of goods and materials to a Syncrude plant was made by NAR to get rid of its contractual arrangements with the taxpayer and to avoid all future litigation. Since the payment was made from NAR's standpoint as a deductible expense and not to acquire a capital asset, the proceeds were not received by the taxpayer in respect of an eligible capital amount, and instead were proceeds of disposition of its rights under the contract with NAR.

The Queen v. Goodwin Johnson (1960) Ltd., 86 DTC 6185, [1986] 1 CTC 448 (FCA)

The sum of $830,000 received by the taxpayer, which had been the manager of a logging operation, in settlement of its action for termination of the agreement under which it had acted as manager, was proceeds of disposition rather than an eligible capital amount. Under the mirror image rule, if the taxpayer had made the payment rather than receiving it, the payment would have been a deductible expense rather than a capital expenditure, since the purpose of the payment was to settle a breach of contract action rather than to acquire the capital structure of the taxpayer's business.

The Queen v. Demco Management Ltd., 85 DTC 5603, [1986] 1 CTC 92 (FCA)

Mahoney, J. stated that a definition of the goodwill of a private hospital "should bear in mind that the basis of its worth was its power to attract custom."

Words and Phrases
goodwill
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 68 52

Samoth Financial Corp. Ltd. v. The Queen, 85 DTC 5473, [1985] 2 CTC 275 (FCTD), aff'd 86 DTC 6335, [1986] 2 CTC (FCA)

The plaintiff, which purchased the exclusive right to sell Century 21 franchises to licensed real estate brokers, was found to be in the business of selling real estate franchises, and such sales accordingly gave rise to business income rather than the receipt of credits to its cumulative eligible capital.

Mahoney, J. in the Court of Appeal stated: "In applying the so-called 'mirror-image rule' in the circumstances, the face to be seen in the mirror by the Appellant is not that of the actual purchaser of one of its franchises acquiring a capital asset but its own face, that of a trader in franchises."

The Queen v. Leopold Lague Ltd., 82 DTC 6310, [1981] CTC 348 (FCTD)

The assignment by a school bus operator of a 3-year contract with a school board constituted the disposition of an eligible capital property rather than a sale on income account: (1) the assigned contract covered 3 of the 22 bus routes serviced by the taxpayer and thus constituted a large part of the productive structure of its business; (2) this was the first such sale by it; and (3) at the time of tendering for the contract (as opposed to executing it) the taxpayer had no assurance of being able to resell it.

The Queen v. Timagami Financial Services Ltd., 82 DTC 6268, [1982] CTC 314 (FCA)

Where the consideration for sale of goodwill is to be paid to the vendor over a series of years, then 1/2 of the amounts so paid are included as eligible capital amounts in computing the vendor's income in the years of payment as opposed to the earlier year of sale: in the year of sale, the amounts to be paid in subsequent years were not then "payable".

Words and Phrases
payable

Pepsi-Cola Canada Ltd. v. The Queen, 79 DTC 5387, [1979] CTC 454 (FCA)

A payment of $100,000 made to the taxpayer upon the termination of an agreement between the taxpayer and Schwepps Powell Ltd. under which the taxpayer was the exclusive agent for the bottling and sale of Schwepps products in the Montreal area, was held to be a payment for goodwill. The taxpayer had built up a good name and reputation for its business in Schwepps products, as evidenced by a substantial increase in sales, and for the purpose of effecting a transfer of its goodwill to Schwepps the taxpayer had given Schwepps a customer list. [C.R.: 18(1)(a) - "Capital expenditure v. expense]

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 41

See Also

Henco Industries Limited v. The Queen, 2014 DTC 1161 [at 3528], 2014 TCC 192

payment to withdraw from business was not an eligible capital amount

A subdivision property of the taxpayer, a developer, was blockaded by Six Nations protesters. To diffuse the conflict, the Ontario government passed a by-law prohibiting any use of the property (rendering it valueless), and then agreed to pay the taxpayer $15,800,000 in exchange for relinquishing its rights to the property and under a court order against the protesters, and for a release.

After finding that the $15,800,000 was a capital receipt which was not income under s. 9 (see s. 9 - compensation payments), C Miller J found in applying the mirror image rule that, as the hypothetical consideration which the taxpayer would have received for a hypothetical payment by it of the $15,800,000 would have been the loss of its goodwill (para. 199), which would not have qualified as an eligible capital expenditure, the (actual) $15,800,000 payment received was not an eligible capital amount.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence parol evidence rule not applying to surrounding evidence/press releases admitted 227
Tax Topics - General Concepts - Fair Market Value - Land deference to taxpayer's figure within appraiser's range of values 105
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) compensation received in course of business but not in course of earning income 184
Tax Topics - Income Tax Act - Section 23 - Subsection 23(1) land ceased to be inventory through sterilization rather than business cessation 176
Tax Topics - Income Tax Act - Section 3 compensation payment for destroyed business was non-taxable 163
Tax Topics - Income Tax Act - Section 9 - Compensation Payments compensation payment for destroyed business was non-taxable 163

R & C Commrs v. Mertrux, [2012] UKUT 274 (Tax and Chancery Chamber)

The taxpayer was a Mercedes dealer, licensed through Daimler-Chrysler UK ("DCUK"). DCUK exercised its rights under its dealer agreements to terminate the agreements. This would normally require 24 months' notice, but could be 12 months in limited circumstances. The dealers and DCUK disputed which period applied, and eventually arrived at a settlement in which dealers would receive a "territory release payment" ("TRP") for surrendering the dealership after 24, 18, or 12 months, with a higher TRP for an earlier termination. The taxpayer elected to take the earliest termination and highest TRP, which was paid by a third party ("Leadley") that took over the taxpayer's dealership.

Under UK tax law, an amount paid for goodwill would qualify for "roll-over relief," but an amount paid for the surrender of a right (such as the right to be a Mercedes dealer) would give rise to capital gains treatment.

The Upper Tribunal found (reversing the First-tier Tribunal) that, although the basic TRP (i.e. for a 24-month termination) could be attributed to goodwill, the additional amount for early termination could not. It stated that the "natural inference" was that, in receiving a higher TRP because of early termination, "Mertrux was being paid to forgo the opportunity to continue to earn profits as a dealer, as it was entitled to under the Dealer Agreement, as varied by the [settlement]" (para. 20).

Contrary to the First-Tier Tribunal's finding, the characterization of the payments from Leadley's perspective (who had no reason to pay compensation for the loss of the dealership) was irrelevant. The Tribunal stated (at para. 22):

In any case, it is inherently unlikely that Leadley paid the whole of the TRP for goodwill of Mertrux. The reality is surely that it paid the TRP because DCUK required it to as a condition of becoming a dealer. From Leadley's point of view, the TRP will have been the price of obtaining a dealership from DCUK.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 167.1 312

Winsor v. The Queen, 2008 DTC 2116, 2007 TCC 692

An amount received by the taxpayer from the federal government as compensation for the cancellation by the federal government of his fishing licence was not an eligible capital amount given that (having regard to the mirror image rule) the federal government had no business purpose in making the payment and, in fact, its purpose in extinguishing the licences was so that they could not be used in any business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property fishing licence was properyt based on administrative law rights 84
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Leases and Licences 26

Fortino v. The Queen, 97 DTC 55 (TCC), briefly aff'd on procedural grounds 2000 DTC 6060 (FCA)

Amounts received by the individual vendors of shares for entering into a non-compete covenant with the purchaser did not represent eligible capital amounts because the vendors were not engaged in any business. The evidence did not reveal that the business of the corporation was, in reality, carried on by its shareholders.

Les Placements A & N Robitaille Inc. v. MNR, 96 DTC 1062 (TCC)

Archambault TCJ. found that a business of manufacturing or reconditioning and selling boats or other nautical products had goodwill that was not purely personal to the shareholder-manager of the corporate owner of the business given that, on the evidence, a sale of such business would have occurred for a purchase price in excess of the value of the tangible assets. However, the goodwill was valued by applying a relatively low capitalization rate (four times) to the business's normalized earnings given the competitive nature of the business, the risk of expropriation of the premises occupied by the business, and the dependence of the profitability of the business on the expertise and efforts of the shareholder-manager.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Other 72

Consumers Software Inc. v. The Queen, 95 DTC 518 (TCC)

Proceeds received by the taxpayer from the sale of a software program (coupled with the granting of a non-compete covenant but with the retention by the taxpayer of copyright in several general-purpose program modules) represented eligible capital amounts given that: licensing the program and the sale of related products were the source of the majority of the taxpayer's business income and were virtually the sole source of income for its sales office in the United States; and it was not a dealer or trader in software.

Administrative Policy

12 January 2015 External T.I. 2014-0555071E5 - POD subject to earn-out

proceeds of goodwill on sale of wind turbine development project

In an arm's length sale the corporate "Vendor" disposes of the "Property" (including land options agreements, permits, engineering data and technical and environmental reports) acquired in the development phase of a proposed wind turbine farm. The proceeds allocated to the Property's disposition are deducted from the Vendor's cumulative Canadian exploration expense ("cumulative CEE") pool, and any remaining proceeds are considered to relate to goodwill. Respecting the portion allocated to goodwill, CRA stated:

[T]he taxpayer is entitled to receive a maximum amount in respect of goodwill that may be reduced where the electricity generation capacity of the wind turbine system is below a certain stated capacity. …[Based on IT-462] provided that the maximum amount represents the fair market value of goodwill at the time of the disposition and provided that there is a reasonable expectation that the electricity generation capacity of the wind turbine system will be met, the maximum amount will be considered to be POD pursuant to element E of the CEC definition. If the electricity generation capacity is not met and the amount of the proceeds is later determined to be less than originally determined, the amount calculated in element E would be reduced accordingly. If this results in a positive CEC balance and the taxpayer's business has ceased, a deduction in accordance with the provisions of paragraph 24(1)(a) might be possible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) proceeds of goodwill on sale of wind turbine development project 193
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - cumulative Canadian exploration expense - Element G proceeds of wind turbine development project 141
Tax Topics - Income Tax Regulations - Regulation 1219 - Subsection 1219(1) wind turbine development project 102

9 February 2015 External T.I. 2013-0480881E5 F - Disposition of Eligible Funeral Arrangement Contracts

proceeds on disposition of funeral home business

Amounts received on the sale of a funeral home business which are allocated to prepaid funeral contracts or other "eligible funeral arrangements" are generally considered by CRA to give rise to eligible capital amounts rather than being exempted by s. 148.1(2)(b)(ii). See summary under s. 148.1(2)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148.1 - Subsection 148.1(2) - Paragraph 148.1(2)(b) proceeds on disposition of funeral home business 257

23 May 2014 External T.I. 2014-0518921E5 F - Calcul de l'élément A du MCIA

A.1 of A reduction does not apply in year of sale

In 2008 a taxpayer with nil cumulative eligible capital disposed of the assets of an active business including goodwill to a related corporation ("CCPC" - which did not hold any other eligible capital property) without taking any s. 110.6 deduction. In 2013, CCPC disposed of the goodwill to an arm's length purchaser at a price in excess of its cost. CRA stated (TaxInterpretations translation):

[T]he reduction by virtue of A.1 [of A] does not apply for a taxation year in which the disposition occurs. … [E]lement A.1 must be taken into account in calculating the CEC of CCPC for the 2008 to 2012 taxation years. As for…2013, element A.1 does not operate to reduce the CEC given that CCPC disposed, before the end of the taxation year to a person with whom it dealt at arm's length, of the goodwill acquired from the taxpayer for an amount greater than the eligible capital expenditure.

29 October 2013 External T.I. 2013-0489911E5 - Disposition of CRCE intangibles

CRCE intangibles

A developer of an electricity generation project transfers the related contracts and development work (the "Intangible Expenditures") to another taxpayer who then completes the building of the plant. The project satisfies Reg. 1219, so that the Intangible Expenditures ere eligible for treatment by the developer as Canadian renewable and conversation expense and as Canadian exploration expense. Would the Intangible Expenditures represent eligible capital property?

CRA noted that an "eligible capital amount" ("ECA") is defined (per s. 14(1), and "E" of CEC under s. 14(5)) to exclude an amount that is deducted in computing any balance of undeducted expenses. As s. 66(12.1)(a) provides that the amount receivable by the developer for the Intangible Expenditures will reduce its CCEE balance, the amount will not qualify as an ECA. Consequently, the Intangible Expenditures will not be considered "eligible capital property," which is defined under s. 54 to mean property a part of the proceeds of disposition of which would qualify as an ECA.

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

In finding that a break fee arguably gave rise to an inclusion in income as an eligible capital amount if it were not already included in income under s. 9(1) or s. 12(1)(x), , CRA indicated that the break fee was received by the taxpayer in respect of a business carried on by it. Furthermore, as "by virtue of subparagraph 39(1)(a)(i), a capital gain does not include any gain arsing from the disposition of an eligible capital property" the receipt of the break fee did not give rise to a capital gain.

27 January 2011 External T.I. 2010-0380081E5 - Trailing commissions

In response to a query as to whether a payment received for the transfer of brokerage clients in respect of whom trailer commissions were being received would be a deductible payment, CRA stated:

Where such a transaction consists of the sale of an entire business, or an entire division of a business, it would generally be expected that the receipt would be on account of capital.

17 February 1995 Internal T.I. 4-950379 -

Any payment made to a fisherman to retire a fishing licence or other right or privilege to commercially fish is an eligible capital amount.

11 January 1995 Memorandum 940294 (C.T.O. "Retiring Fishing Licences")

Payments received by fishermen under a compensation program to retire or decrease their fishing rights represent eligible capital amounts under the mirror image rule.

30 March 1994 T.I. 940757 (C.T.O. "Player Contracts - Proceeds of Disposition")

Proceeds received by the vendors on the sale of a sports team in respect of players' contracts will not be eligible capital amounts because the purchaser of a sports team is allowed to write off the amount allocated to the acquisition of the players' contracts over the estimated playing life of the players. The amounts allocated to players' contracts will be considered the proceeds of disposition of capital property.

17 January 1991 Internal T.I. 7-90326 -

Damages paid by a principal business corporation to an investor limited partnership including amounts in respect of interest assessed against the partners as a consequence of a failure to renounce agreed amounts were eligible capital expenditures to the principal business corporation.

Element A.1

Administrative Policy

22 March 2016 Internal T.I. 2013-0506561I7 - Property acquired on a return of capital

no gain to FA transferor of ECP

A return-of-capital distribution by the foreign affiliate of a Canadian corporation of eligible capital property (in this case, intellectual property with an unlimited life) gave rise, for purposes of applying the eligible capital expenditure definition to the Canadian shareholder, to an expenditure incurred by it equal to the FMV of the property at the time of distribution. CRA then stated:

[W]e understand that there is no gain realized by the foreign affiliate on the disposition. Thus, it is not necessary for us to consider whether Variable A.1 can apply in these circumstances.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(4) FMV cost of property acquired on QROC distribution 115
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) FMV cost of property acquired on contribution of capital 115
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base FMV cost of contributed or distributed property 51
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure QROC distribution by a foreign affiliate to its Canadian shareholder of ECP results in ECE to the shareholder of the property’s FMV 210

Element E

Administrative Policy

11 September 2015 Internal T.I. 2015-0586301I7 - Premiums received on re-opening of debt

premium received on note re-opening subject to eligible capital amount treatment if not otherwise taxable

Rather than issuing fresh notes, a company obtained the noteholders’ agreement to extend the current notes’ maturity, and received a premium given that their stipulated interest rate was now higher than prevailing yields. The Directorate found that the premium came within its position in S3-F6-C1, para. 1.96 that “the interest expense will be reduced over the life of the [re-opened] debt with reference to the amount of the premium.”

The Directorate also stated:

As a result of the 2006 amendments to variable E [of cumulative eligible capital]… [a] disposition is no longer stipulated in variable E and the mirror image test is no longer required. …

[T]he premiums received by the Taxpayer could now fall within amended variable E of the definition of CEC, assuming that the amounts…have [not] reduced the amount of an outlay or expense, (i.e., …if a reduction to paragraph 20(1)(c) did not apply as discussed above.)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) denied interest expense where a premium was received on extending notes’ maturity 167

Eligible Capital Expenditure

Cases

Brooke Bond Foods Ltd. v. The Queen, 84 DTC 6144, [1984] CTC 115 (FCTD)

Amounts expended for plans and specifications of a building that ultimately was not constructed were expended for the purpose of creating a capital asset, and were an eligible capital expenditure rather than a deductible expense.

The Queen v. Royal Trust Corp. of Canada, 83 DTC 5172, [1983] CTC 159 (FCA)

In an underwriting agreement, the taxpayer agreed to issue common shares to the underwriter at $8.00 per share and pay an underwriting commission of $0.54 per share. The underwriter sold the shares to the public at $8.00 per share. The underwriting commissions constituted an "outlay or expense" under the definition that was paid for services rendered by the underwriter in connection with pricing, distributing and managing the public issue of its shares, rather than a discount, notwithstanding that there was a firm underwriting. The exclusion from deductibility in the pre-1979 version in S.20(1)(e) of commissions paid to a person to whom the shares were issued, was not intended to apply to the provision of s. 14(5)(b)(i) excluding amounts made nondeductible by some other provision of the Act. Finally, expenditures incurred in the raising of capital to be used in the company's operations meet the test in s. 14(5)(b)(i) (incorporating by reference s. 18(1)(a)) and in the preamble that they be made "for the purpose of gaining or producing income from the business". The fees therefore qualified as eligible capital expenditures made by the taxpayer.

See Also

Devon Canada Corporation v. The Queen, 2018 TCC 170, 2018 TCC 170

payments made to target’s employees for surrendering their options on target’s acquisition were mostly deductible by it

Two public-company predecessors by amalgamation of the taxpayer made cash payments for the surrender by employees of their options previously granted to them under employee stock option plans. Such surrenders occurred (and were previously contemplated in agreements with purchaser corporations to occur) in connection with the acquisition of all their shares by unrelated corporate purchasers.

The taxpayer did not argue that the surrender payments were fully deductible under s. 9, but instead successfully argued that they were deductible as to 75% under s. 111(5.2). Before concluding that the surrender payments were eligible capital expenditures, Sommerfeldt J found that the surrender payments satisfied the requirements in the preamble of the definition in s. 14(5) that:

  • they were “in respect of a business” given inter alia that they “were made to employees who had been granted their options while working in the business of their respective employers and who, for the most part, continued to work in those businesses after the respective acquisitions” (para. 86)
  • they were capital expenditures having regard to Kaiser Petroleum and Imperial Tobacco
  • they were made for the purpose of gaining or producing income from the business given that under this test “it will suffice if the income-gaining purpose is [only] one of the purposes of the outlay or expense” (para. 92) and that, similarly to Imperial Tobacco, they had “an employer-compensation-related purpose” (para. 96)

Furthermore, the exclusion in para. (f) of the ECP definition for “the cost of … a right to acquire [a share]” did not apply given that “the word ‘cost’ contemplates an acquisition of an asset or other property” (para. 103), whereas “when a stock option is surrendered to the issuing corporation, the rights represented by that option [instead] are extinguished” (para. 122).

Words and Phrases
cost
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) - Subparagraph 20(1)(e)(i) quaere whether “sale” includes a sale to a 3rd party 167
Tax Topics - Income Tax Act - Section 111 - Subsection 111(5.2) stock option surrender payments of target deductible under s. 111(5.2) 63
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition disposition of surrendered stock options occurred under doctrine of merger 287
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base "cost" implies the acquisition of an asset 163

Rio Tinto Alcan Inc. v. The Queen, 2016 TCC 172

fees incurred in order to acquire shares were excluded/butterfly expenses excluded as taxpayer was not in the business of implementing corporate reorganizations

The taxpayer (“Alcan”) incurred various investment dealer, legal and other fees in connection with its successful hostile bid for most of the shares of a French public company (“Pechiney”). After finding that a portion of those fees were deductible in full under s. 9 or (alternatively) s. 20(1)(bb), Hogan J went on to find that the balance were part of the cost to Alcan of the Pechiney shares acquired by it rather than qualifying as eligible capital expenditures, stating (at paras. 204, 206):

[T]he Appellant actively spent the capital portion of the Disputed Expenses to implement the transaction whereby it acquired the Pechiney shares. Unlike the situation in Potash, the funds were not spent to enhance the international tax position of the Appellant. They were Execution Costs as defined earlier in these reasons.

Subparagraph (f)(iii) of the definition specifically excludes “any amount that is the cost of, or any part of the cost of” a share.

Alcan also incurred fees on capital account respecting its butterfly spin-off of a subsidiary holding a laminated products division to the Alcan shareholders. Before finding that these expenses were deductible only as disposition expenses under s. 40(1)(a) and in finding that they did not qualify as eligible capital expenditures, Hogan J stated (at paras. 205, 207):

[T]he Appellant exaggerates when it claims that the Spin‑off was accomplished to satisfy its competition undertakings. The Spin‑off embraced a much larger enterprise than the plants in the USA and Europe that were seen by the competition authorities as giving rise to a substantial lessening of competition. I do not believe that the Appellant undertook the Spin‑off simply to comply with its competition undertakings, as it suggested in its written arguments. The evidence, considered as a whole, shows that the Appellant wished to enhance shareholder value through the Spin‑off... .

[T]he Appellant is not in the business of disposing of subsidiaries in favour of its shareholders pursuant to a corporate reorganization implemented on capital account. Those expenses are not amounts incurred in respect of a business of the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees investment dealer fees incurred respecting the advisability of making hostile takeover were fully deductible under s. 9 393
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) investment dealer fees re advisability of making hostile takeover were fully deductible 515
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc) legal fees incurred in securing regulatory approval for a hostile bid related to the bidder's business of earning income from shares and interaffiliate sales 170
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(g) takeover bid circular costs did not qualify 96
Tax Topics - Income Tax Act - Section 169 - Subsection 169(2.1) raising general question of deductibility of fees and listing s. 20(1)(e) did not satisfy s. 165(1.11) 228
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) failure to advance evidence showing allocation of fees to share consideration 131
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) expenses incurred in butterfly spin-off recognized as disposition expenses 61
Tax Topics - Statutory Interpretation - French and English Version finding common meaning of 2 versions of s. 20(1)(bb) 102

Potash Corporation of Saskatchewan Inc. v. The Queen, 2011 DTC 1163 [at 873], 2011 TCC 213

The taxpayer incurred legal and accounting fees in 1997 and 1998 of approximately $1.9 million in connection with a complicated reorganization of the manner in which it financed its investment in its US subsidiaries. The end result of the reorganization was that it financed that investment through a Luxembourg subsidiary so that cash flow paid out of the US subsidiaries was subject to US withholding tax of 5% and to Luxembourg income tax of 5% - whereas if it had continued to maintaing its previous structure, such distributions would have been subject to a 30% US withholding tax rate due to an adverse change in the US tax regime.

In finding that these were capital expenses, Hershfield J noted (at para. 88) that they were paid in order to create an entirely different "pipeline" or structure for maintaining the after-tax cash flow of the taxpayer, noted (at para. 92) that in Imperial Tobacco (and similarly in Kaiser Petroleum) "that an outlay made in the course of a corporate reorganization to achieve an assurance that some end goal will be completed or achieved in a manner that will have value, will be on capital account," and that although the tax benefits of this new structure would last only three years due to impending changes in the US-Luxembourg treaty, this nonetheless represented an enduring benefit becasue more than the current period was benefited (para. 98).

In finding that the expenditures satisfied the income-producing purpose test in the definition of a eligible capital expenditure, Hershfield J stated (at para. 108):

...expenditures incurred to improve the efficiency of the investment to enable better exploitation of its own business by increasing its debt service capability and increasing its funding of Canadian operations are expenditures incurred for the purpose of earning income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees improved tax efficiency was enduring (3 year) benefit 224

Martin v. The Queen, 2009 DTC 1251, 2009 TCC 152 (Informal Procedure)

"Commissions" paid by the taxpayer (a chartered accountant) generally over the course of several months to the former owners of accounting practices acquired by him and calculated as a percentage of the fees collected by him from the acquired practices, were eligible capital expenditures rather than totally deductible expenses notwithstanding that the amounts were not paid as a lump sum and were not in instalments on account of a fixed purchase price, given that the purpose of the agreements with the recipients of the "commissions" was to obtain a lasting benefit by expanding the taxpayer's clientele.

Graham Construction Engineering (1985) Ltd. v. The Queen, 97 DTC 342 (TCC)

Professional fees incurred in connection with a share reorganization of the taxpayer in which its shareholders transferred their shares to a holding company were found not to be incurred in connection with any activities which formed part of the business by which the taxpayer earned income and were incurred in connection with its dealings with its own shareholders as shareholder. Accordingly such fees were for capital purposes and, as capital expenditures, were to be treated in accordance with a concession of the Minister, as eligible capital expenditures.

212535 Oil & Gas Ltd. v. MNR, 96 DTC 1263 (TCC)

Each taxpayer closed the purchase of a 10% interest in a resource property by giving the vendor an interest-bearing demand promissory note for $3.5 million. Three months later, when it was discovered that the 10% interest had a fair market value of at least $4.75 million, it was agreed that the $3.5 million promissory note would be replaced by one for $4.75 million.

Rip TCJ. found that the additional $1.25 million was incurred by each taxpayer on account of capital for the purpose of gaining or producing income from its business and, therefore, was an eligible capital expenditure. Because there was no intent by the taxpayers or the vendor that the second note would represent any payment of the original note, the exclusion for amounts paid "as, on account or in lieu of payment of any debt" did not apply.

The Queen v. de Loppinot, 78 DTC 6477, [1978] CTC 705 (FCTD)

An agreement between a retiring chartered accountant ("Peloquin") and a firm of chartered accountants - wherein the firm agreed to pay Peloquin 20% of the fees generated from Peloquin's clients for the five-year period following the date of the agreement and to service those clients in Peloquin's name, and Peloquin agreed to become at least nominally a member of the firm, and to service those clients if asked to do so by the firm - was characterized as a type of partnership contract rather than an agreement for the sale of the goodwill of Peloquin's practice. Fees paid to Peloquin accordingly were characterized as partnership draws rather than capital expenditures.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 95

Administrative Policy

14 March 2016 Internal T.I. 2015-0609671I7 - Earnout, Amalgamation, Cost of Shares and ECE

payments made by Amalco in satisfaction of earnout obligation for acquisition of one precedessor by the other were not ECE

A Canadian Acquisitionco acquired Canadian Targetco for a cash base price plus earnout obligations, and then immediately merged with Targetco under a short-form amalgamation. The Rulings Directorate rejected Amalco’s treatment of its earnout payments as eligible capital expenditures, stating:

[R]egardless of whether the [Targetco] Shares existed at the time that the Earnout Payments became payable or paid, the Earnout Payments nevertheless are part of the cost of the Shares. Mandel…appears to dictate such a result….

The Directorate went on to find that, in any event, the earnout payments were not made for the purpose of gaining or producing income from a business, stating:

Amalco has to be placed in the shoes of Acquisitionco at the time of Acquisitionco entering into the Agreement. At that time, the purpose for the Earnout Payments was not to earn income from a business but to acquire a capital asset, i.e., the Shares.

In the alternative, a position can be taken that the Earnout Payments were not incurred for the purpose of earning income from a business because Amalco became liable for and incurred the Earnout Payments as a consequence of the mechanisms of an amalgamation as set out in the BCA and the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) post-amalgamation earnout payment could be applied to increase an s. 88(1)(d) bump of capital property (but not ECP) of the amalgamated target 299
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base earnout payments an addition to cost of shares which had since disappeared 78
Tax Topics - General Concepts - Purpose/Intention attribution of predecessor's intention to Amalco 132
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) position on interest deductibility following target amalgamation is based on policy and ITA scheme rather than technical 338

22 March 2016 Internal T.I. 2013-0506561I7 - Property acquired on a return of capital

QROC distribution by a foreign affiliate to its Canadian shareholder of ECP results in ECE to the shareholder of the property’s FMV

What is the cost (and amount incurred as an expense) for intellectual property with an unlimited life acquired by a corporation resident in Canada as a result of a return of capital from a wholly-owned foreign affiliate?

CRA first noted that property contributed for no consideration to a corporation by its shareholder, or received by a Canadian corporate shareholder from its wholly-owned foreign affiliate on a return of capital (or other upstream transfer), generally will have a cost to the transferee equal to the property’s fair market value. CRA then stated:

We see no reason to apply different reasoning in respect of the determination as to whether the shareholder has “made or incurred” an “outlay or expense” for the purpose of the ECE definition… . Thus… a Canadian corporate shareholder that receives such [ECP] property from its wholly-owned foreign affiliate on a return of capital should be considered to have “made or incurred” an “outlay or expense” in an amount equal to the FMV of the property at the time of the distribution.

…[W]e understand that there is no gain realized by the foreign affiliate on the disposition. Thus, it is not necessary for us to consider whether Variable A.1 [in the CEC definition] can apply in these circumstances.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(4) FMV cost of property acquired on QROC distribution 115
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) FMV cost of property acquired on contribution of capital 115
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base FMV cost of contributed or distributed property 51
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital - Element A.1 no gain to FA transferor of ECP 93

30 July 2015 External T.I. 2014-0552041E5 F - Permis XXXXXXXXXX

renewable government licences were ECP, not Class 14

CRA found that a government licence which could be renewed each year on the payment of a fee was an eligible capital property rather than a Class 14 property, apparently on the basis that the taxpayer therefore had the right to extend the life of the right indefinitedly.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 14 renewable government licences were ECP, not Class 14 194

27 June 2014 External T.I. 2014-0526931E5 F - Vente d'une liste de clients par un employé

payment to departing employee for customer list was on capital account

An employer agrees to purchase the customer list of an employee prior to his cessation of employment. CRA stated (TaxInterpretations translation):

[A]n amount paid for a customer list and for a non-compete agreement, which procures an enduring advantage for the purchaser, constitutes an eligible capital expenditure.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(3) - Paragraph 6(3)(e) payment to departing employee for customer list was deemed income under s. 6(3) 99

29 October 2013 External T.I. 2013-0507121E5 - Website costs

Determining whether website costs are in the nature of income or capital should entail an analysis of each component of the site. The determination depends predominantly on the expected useful life of the website, although "some components of the development costs are likely capital in nature."

To the extent that expenses are in the nature of capital, they may be added to the capital cost of "applications software" as described in Class 12 of Schedule II. Such costs include the labour costs incurred to design and develop software to carry out the website functions. Some components may instead be "data network infrastructure equipment" or "systems software" described in Class 46.

A particular capital expenditure that is not a depreciable property may instead be an "eligible capital expenditure" described in s. 14(5) or the Act.

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.

12 June 2003 Internal T.I. 2003-001100 -

As a result of selling a business the taxpayer was no longer able to fulfill its obligations under a supply contract and negotiated a termination of the contract in consideration for the payment by it of a termination fee. The fee paid was on capital account given that it was made in relation to the cessation of a business of the taxpayer. However, the taxpayer would be allowed to treat the termination payment as an eligible capital expenditure.

5 March 2003 External T.I. 2002-015140 -

Respecting the question whether various fees incurred by a taxable Canadian corporation with respect to the proposed acquisition of another taxable Canadian corporation that did not proceed would qualify, the Agency indicated that although, while normally the requirement that the expense be incurred for the purpose of earning income from a business will not be satisfied for the fees that are incurred in respect of aborted attempts to acquire shares, "the CCRA will accept that these fees qualify as eligible capital expenditures if the taxpayer can demonstrate that the taxpayer intended to make the business of the target corporation part of a similar business that the taxpayer already operated ... [and] the CCRA will generally accept that a taxpayer intended to make the business of the target corporation part of a similar business where the taxpayer planned to amalgamate with, or wind-up, the target corporation after the acquisition."

18 February 2002 External T.I. 2002-01883 -

In a Canadian asset acquisition by a Canadian corporation ("Buyco"), $20 of the total $200 purchase price is allocated to pension surplus. CCRA stated that:

"The $20 paid by Buyco for the pension surplus would be a capital outlay by Buyco, for which there is no deduction in the Income Tax Act. This is based on the presumption that a pension surplus would likely be excluded from the definition of ECE by virtue of paragraph (f) of the definition of this term in subsection 14(5) of the Act."

1 March 2001 External T.I. 2001-006871 -

Expenses incurred by a taxpayer with respect to an aborted debt offering where there was no substituted transaction would qualify as eligible capital expenditures if the plan had been to borrow the funds for the purpose of gaining or producing income from a business (as opposed to income from property). No deduction would be available under s. 20(1)(e).

7 February 1992 TI (Tax Window, No. 16, p. 19, ¶1739)

The proceeds of sale of a sports franchise would be an eligible capital amount to the vendor and an eligible capital expenditure to the purchaser.

28 March 1991 Memorandum (Tax Window, No. 2, p. 25, ¶1186)

Costs incurred by an oil or gas company to acquire an easement to build a pipeline or to acquire a right of way to build a road are eligible capital expenditures rather than part of the capital cost of the pipeline.

Subsection 14(7) - Replacement property

Administrative Policy

17 April 2012 External T.I. 2011-0427411E5 F - Bien de remplacement-immobilisation admissible

shares cannot be replacement property

Where the taxpayer sells his business including client lists, purchased shares of a corporation carrying on a similar business will not qualify as a replacement property under s. 14(7) given that:

The cost of the shares is not an eligible capital expenditure pursuant to subparagraph (f)(iii) of the definition of "eligible capital expenditure" in subsection 14(5).

Subsection 14(15) - Beginning to use property in Canadian business

Articles

Orest Moysey, Stan Mag, "New Canadian Branch Making Rules for Foreign Banks: Opportunities and Issues", International Tax Planning, 2000 Canadian Tax Journal, Vol. 48, No. 6, p. 1869.