Oversight or Investment Management

Table of Contents

Oversight or Investment Management
Cases(3)
See Also(4)
Administrative Policy(6)

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 492
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(g) takeover bid circular was not a financial report 175

The Queen v. Young, 89 DTC 5234, [1989] 1 CTC 421 (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

Watson as trustee for the Murrindindi Bushfire Class Action Settlement Fund v Commissioner of Taxation, [2020] FCAFC 92

expenses incurred in administering a litigation settlement fund were not deductible from the related interest income

The taxpayer was the scheme administrator of an arrangement for the distribution of the $300 million agreed to be paid by the defendants in a class action suit arising out of the 7 February 2009 Murrindindi bushfire. In the income year ended 30 June 2016, interest income of $8,355,722 accrued on the bank deposits and the taxpayer (as Scheme Administrator) incurred $4,341,327 in costs and expenses in administering the Distribution Scheme. The overwhelming majority of the work carried out was to oversee the assessment of claims made by group members, which almost entirely consisted of legal and other fees of the taxpayer’s staff and fees or disbursements paid to those engaged to assist in assessing the claims of the various group members. The costs related to the derivation of interest income were minimal. In issue in this appeal was whether costs and expenses incurred by the taxpayer in the administration of the Distribution Scheme were deductible pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), which provided that:

  1. You can deduct from your assessable income any loss or outgoing to the extent that:
  1. it is incurred in gaining or producing your assessable income; or
  2. it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

And went on to provide:

  1. However, you cannot deduct a loss or outgoing under this section to the extent that:
  1. it is a loss or outgoing of capital, or of a capital nature; …

The Court dismissed the appeal, finding (at paras 39, 42 and 48):

The activities conducted by the taxpayer pursuant to the Distribution Scheme were conducted by him in implementing and administering the Distribution Scheme. Such activities lacked the character of activities conducted as a business. …

… [T]he taxpayer, in administering the Fund, was not turning his talent to account for money but was administering a court-approved scheme for the distribution of a settlement sum agreed upon by parties to a class action.

Properly analysed, the costs of administering the scheme were costs incurred in the course of effecting the distribution of the settlement sum to claimants entitled to share in the settlement sum, and thus costs incurred on capital account. The requirement that the settlement sum be held in interest-bearing accounts pending distribution as part of the Distribution Scheme does not give the costs of administering the scheme the character of revenue outgoings.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business administration of litigation trust (generating interest income) was not a business 265

Wickham Estate v. The Queen, 2015 DTC 10125 [at 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 46
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) payments to (otherwise) retired investment manager deductible 271

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, [1980] CTC 2431 (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 140
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 29 Folio S4-F15-C1 applies for purposes of the new accelerated CCA rules 229
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) extension of M&P guidance to oil and gas sector 61
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 186
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 131

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. 2002-0151405 - Transaction Costs - Aborted Acquisition

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."

26 April 2002 Internal T.I. 2002-0129707 F - FRAIS D'OUVERTURE DE COMPTE

admin fee on becoming a holder of shares that were not a source of property income was a non-deductible capital expenditure and ACB addition

An administrative fee paid by a shareholder on becoming an account holder would be a capital expense that was an addition to the ACB of the holder’s shares rather than a deductible expense given that the shares were not a source of property income and the sole prospective return was a capital gain.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base admin fee for shares that generate only capital gains is an ACB addition 52
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) admin fee for shares that generate only capital gains cannot be deducted under s. 20(1)(bb) 55

17 July 2001 External T.I. 2001-0068355 F - DEDUCTION D'UN BONI A UN EMPLOYE

investment performance bonus to be deductible would need to be incurred as part of the activity of managing the investments

Regarding whether a performance bonus paid to an employee based on the appreciation in value of a capital property that the employer disposed of would be currently deductible, CCRA indicated that this would be a question of fact, but noted:

[I]n order for an expense to be deductible, it must be part of the activity of earning income from a business or property. In general, income from property (interest, dividends) arises from holding an investment, which requires little activity on the part of the investment holder.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) bonus paid to manage investments would not be a disposition expense 121

10 June 1998 Internal T.I. 9808707 - TRAVEL PROMO AND SALARY EX FOR INVEST CORP

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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