Oversight or Investment Management

Cases

Canada v. Rio Tinto Alcan Inc., 2018 FCA 124

dealer and professional fees incurred by a public board in determining to make a bid, as contrasted to implementation, were currently deductible

Pelletier JA confirmed the distinction between fees relating to acquisition and divestiture transactions of the taxpayer (“Alcan”) that were “incurred as part of Alcan’s decision-making process” (“oversight expenses”) and fees that “were incurred in the course of putting into effect Alcan’s decision once it had been made” (“implementation costs”) (para. 105). Accordingly, he confirmed Hogan J’s finding that the substantial portion of investment dealer fees incurred by the Alcan board that represented input to its decision to launch a hostile bid for a French public company (i.e., 65% of the Morgan Stanley fee and 35% of the Lazard Frères fee) was currently deductible, whereas the balance of the fees relating to assistance in the bid was a capital expenditure (and, thus, an addition to the adjusted cost base of the acquired shares). In this regard, he stated (at para. 72):

[T]he normal management of a company’s business operations may include the evaluation of a future course of action which may or may not result in the construction or acquisition of a capital asset. As the Court pointed out, the mere fact that an expenditure is incurred in the course of deciding whether or not to acquire or create a capital asset, does not mean it is necessarily made on account of capital.

The quality of information required by a public-company board also supported the current deductibility of the oversight expenses (paras. 77-78).

$19M in fees paid to a French lobbyist firm, whose purpose “was to facilitate the implementation of the Pechiney transaction by heading off possible political and public relations issues which might derail the transaction, given Pechiney’s special status … in France” (para. 29), fell into the implementation cost category, and were capital expenditures.

The same principles applied to investment dealer fees incurred respecting a subsequent butterfly spin-off transaction, so that the portion of Lazard Frères fees that related to advice on various divestiture options up to the time of the final board decision to effect a butterfly spin-off was fully deductible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) deduction was available for advisory fees respecting proposed acquisitin or divestiture of a whole company 472
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(g) takeover bid circular was not a financial report 154

The Queen v. Young, 89 DTC 5234 (FCA)

fees incurred in building up a capital share portfolio

The taxpayer, a retiree, "was assembling a portfolio of equity shares...with a view to expanding the capital base by reinvesting the earnings however derived" (p. 5236). Subscription expenses for five investment publications which were used as guides in deciding whether to buy stocks on the basis of their expected yields were used by the him for deciding on the purchase or sale of such investments, managing them investments and generally in the administration of an expanding portfolio of such capital assets, rather than for the purpose of earning income from property. They were non-deductible capital expenditures.

Firestone v. The Queen, 87 DTC 5237, [1987] 2 CTC 1 (FCA), rev'g 86 DTC 6405, [1986] 2 CTC 251 (FCTD)

fees for expansion of portfolio

Expenditures incurred by the taxpayer in assembling a conglomerate of four companies were non-deductible: "an expenditure for the acquisition or creation of a business structure is on capital account." It was held that costs of investigating 50 other opportunities that did not lead to acquisitions should be treated on the same footing since they were incurred as part of the taxpayer's plan of assembly of business assets.

Expenditures for the supervision of the companies, once acquired, were deductible. It was noted, however, that "if the only possible profit from the appellant's supervision expenses were to have been an accretion in the market value of the appellant's shares of capital stock in the operating companies, then his failure to charge management fees to those companies might have been fatal".

See Also

Wickham Estate v. The Queen, 2015 DTC 10125 [at 102], 2014 TCC 352 (Informal Procedure)

pro rata denial based on portfolio portion invested in RRIF

Investment management fees paid by the taxpayer were fully deductible under s. 20(1)(bb) except for the portion thereof that was denied under s. 18(1)(u)). Before so concluding, Paris J stated (at para. 19) that "since the management services provided by Mr. Sanders related to capital assets held by Ms. Wickham, the fees would be non-deductible capital expenditures unless otherwise provided." See detailed summary under s. 20(1)(bb).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(u) pro rata denial based on portfolio portion invested in RRIF 40
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) payments to (otherwise) retired investment manager deductible 263

Revenue and Customs Commissioner v. Peter Clay Discretionary Trust, [2009] 2 WLR 1353 (CA)

fees re income beneficiaries on income account

Fees of investment advisors incurred by a discretionary trust were on capital account because they were incurred after the trustees had resolved to accumulate income. However, the portion of fees of the trustees that related to addressing matters which were explicitly for the benefit of income beneficiaries would have been chargeable to income.

Wilson v. MNR, 80 DTC 1379 (T.R.B.)

fees for income returns

The taxpayer, who derived 1/3 of his income or approximately $20,000 per annum, from a portfolio of stocks and bonds was able to deduct the $1,020 cost of subscribing to six investment advisory letters.

Administrative Policy

6 June 2019 CPTS Roundtable, 2019-0816111C6

project expenses incurred after determining economic feasibility and before project approval are generally deductible

What is the characterization of pre-Final Investment Decision (“FID”) expenses, i.e., are expenses incurred prior to the approval of a project generally deductible? CRA responded:

FID is dependent on many things including a particular taxpayer’s circumstances, critical time path, availability of equipment, and resources. Additionally, the extent of work done prior to making a FID will generally depend on the taxpayer’s policies respecting capital projects and may not necessarily be the same for all taxpayers. Consequently, the CRA does not accept that there is bright line test, such as FID, to determine the characterization of expenses for income tax purposes.

… [E]xpenditures in respect of research in determining economic viability may be considered to be on income account ... . The economic viability determination of a project may include preliminary designs for tangible assets and estimating capital and operating expenses.

There are a variety of activities undertaken subsequent to the preliminary economic viability study. These may include government approval, equipment specification, contract negotiations, stakeholder consultations, refinement of the economic viability study, etc. In determining the correct classification of expenses incurred for each activity, the CRA ascertains the purpose of the expenditure and whether the expenditure brings into existence an asset or advantage that has an enduring benefit. If so, it is denied current deduction … .

… The postponement or cancellation of a project does not alter the nature of an expense incurred in connection with such project.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 231.2 - Subsection 231.2(1) taxpayers can choose between reasonable alternative formats (e.g. hard or soft) for providing their tax working papers/records 124
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 29 Folio S4-F15-C1 applies for purposes of the new accelerated CCA rules 193
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) extension of M&P guidance to oil and gas sector 57
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Start-Up and Close-Down Expenditures no acceptance that expenses incurred before decision to proceed are thereby on current account 168
Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - Accelerated Canadian Development Expense - Paragraph (a) - Subparagraph (a)(ii) accelerated CDE deduction can be available for drilling on land acquired from an affiliate 125

23 March 2007 External T.I. 2006-0207071E5 - Investment Counsel Fees

A performance fee break (based on percentage increases in the fair market value of the portfolio that was being managed) might be deductible, depending on the circumstances, under s. 9 in computing income from a business or property, or be deductible under s. 20(1)(bb).

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

Various fees paid by a taxable Canadian corporation with respect to its proposed acquisition of another taxable Canadian corporation would be considered to be on capital account on the basis of the principle that "in the case of an unsuccessful take-over, these costs will generally be accorded the same treatment, as either income or capital, which they would have been accorded had the acquisition attempt been successful."

10 June 1998 Memorandum 980870

Travel expenses incurred by employees of a corporation whose sole activity was the investment of its capital in shares and other instruments would not be deductible in light of the Firestone case.

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