Adjusted Cost Base

Cases

Bernick v. Canada, 2004 DTC 6409, 2004 FCA 191

cost of bonds equal to their FMV

In finding that the cost to a partnership of bonds acquired by it in consideration for the issuance of units of the partnership was equal to the fair market value of the bonds at the time of acquisition, Sharlow J.A. indicated (at para. 31) that this "method of determining the acquisition cost of the bonds is based on the well established principle of income tax law that the cost of property acquired by a taxpayer is the amount of money or the value of the consideration given in exchange for the property" and noted that as at substantially all of the partnership property comprised the acquired bonds, it was reasonable to conclude that the value of the consideration paid by the partnership for the bonds was equal to the fair market value of the bonds when acquired.

Trzop v. Canada, 2002 DTC 6728, 2001 FCA 380

no addition for unpaid labour

The taxpayer and another individual acquired corporate debt with a principal amount of $5 million for a purchase price of $10 as well as acquiring shares of the corporation. The adjusted cost base of the debt did not include the value of unpaid labour that the taxpayer provided to the company given that there was no term in the purchase agreement requiring the taxpayer to work without pay.

The Queen v. Rumack, 92 DTC 6142 (FCA)

In noting that the fact that a prize was deemed to have a cost did not imply that the prize necessarily was not income, Hugessen J.A. noted (p. 6144)):

"Many income payments are 'acquired' by a taxpayer, in the sense of coming into his possession, at a cost to him equal to their fair market value; obvious examples are salaries, fees, royalties and the like".

Bodrug Estate v. The Queen, 90 DTC 6521 (FCTD), aff'd 91 DTC 5621 (FCA)

An estate paid $1,320,000 to settle an action brought against it by two other persons ("Cohen" and "NIR") for specific performance of an option which the deceased had given to sell shares of a company ("Hidrogas"). This settlement enabled the estate to tender its shares of Hidrogas to a takeover bid at a substantially higher price than the market price at the time of the settlement agreement.

McNair J. held that because "the cost of an asset for the purposes of capital gains computation is limited to the cost of acquisition of that asset" (pp. 6526-6527), the damages payment subsequently made by the taxpayer to NIR and Cohen, which was unrelated to the acquisition of the Hidrogas shares by the taxpayer, was not part of the cost of those shares. McNair J. noted, however, (at p. 6527) that the Minister saw fit to increase the adjusted cost base of the Hidrogas shares for the payment of the $1,320,000 in damages presumably on the basis that "the [taxpayer] paid this sum to regain his rights to the Hidrogas shares". In the Court of Appeal, Stone J.A., in what may have been obiter dicta, characterized the payment of the $1,320,000 as being made in exchange for the surrender of all rights and interests of NIR and Cohen in the Hidrogas shares and as, therefore, forming part of the cost of those shares.

Words and Phrases
cost

Watkins v. The Queen, 90 DTC 6432 (FCTD)

The taxpayer unsuccessfully contended that the adjusted cost base of her race horse (which admittedly was personal-use property) included the expenses which she had incurred in maintaining the horse from the time of his foaling in April 1979 until the time of his sale in November 1982. Applying the test in the Stirling case, the only amount which she gave up in order to acquire the horse was the stud fee of $1,000 paid for having the horse's dam bred to the horse's sire.

Gaynor v. The Queen, 88 DTC 6394 (FCTD), aff'd 91 DTC 5288 (FCA)

The cost of some U.S. securities of the taxpayer was determined by reference to the exchange rate at the time of acquisition rather than the exchange rate at the date of disposition, notwithstanding that the securities were acquired with U.S. funds and the securities were sold for U.S. funds.

Wise v. The Queen, 86 DTC 6023, [1986] 1 CTC 169 (FCA)

deposit

A deposit of $65,000 was received by the taxpayers from the purchaser of real estate apparently as damages to compensate for losses suffered by them as a consequence of the purchaser's failure to close the agreement of purchase and sale. The cost of any property that had been disposed of by the taxpayers accordingly had a cost that was not less than $65,000.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 39

The Queen v. Stirling, 85 DTC 5199, [1985] 1 CTC 275 (FCA)

interest and other bullion carrying charges not added

The word "cost" in s. 54(a) "means the price that the taxpayer gave up in order to get the asset; it does not include any expense that he may have incurred in order to put himself in a position to pay that price or to keep the property afterwards." Interest on the unpaid portion of the price of gold bullion, and safe keeping charges incurred during the period following the taxpayer's acquisition of the bullion, accordingly could not be added to the adjusted cost base of the gold bullion.

Words and Phrases
cost

The Queen v. Pollock, 84 DTC 6370, [1984] CTC 353 (FCA)

cost incurred to acquire right to receive damages

It was indicated in obiter dicta that if the contention of the Crown were accepted that the taxpayer had realized a taxable capital gain from the disposition of his right to receive damages for wrongful dismissal, then evidence as to any costs that the taxpayer incurred towards the acquisition of his right to receive damages would be relevant.

See Also

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

"cost" implies the acquisition of an asset

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.

In the course of determining that the surrender payments were “eligible capital expenditures,” and after noting (at para. 103) the statement in Canada Trustco (2005 SCC 54 at para. 74) that the capital cost allowance provisions “use ‘cost in the well-established sense of the amount paid to acquire the assets,” Sommerfeldt J found that 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).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure payments made to target’s employees for surrendering their options on target’s acquisition were mostly deductible by it 279
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

Plains Midstream Canada ULC v. The Queen, 2017 TCC 207

ACB addition based on future amount payable rather than much lower FMV

The taxpayer (Amoco) assumed a $225M loan that was due in perhaps 43-years’ time and that was effectively non-interest-bearing (as interest was tied to Beaufort Sea oil production) in consideration inter alia for the payment to it of $17.5 million by the debtor. This assumption occurred as part of intricate arrangements for its acquisition of Dome Petroleum for $5.2B under a Plan of Arrangement.

After finding that no portion of the $207.5M difference between these two amounts was deductible interest to Amoco, Hogan J indicated obiter that the $207.5M difference might instead be an addition to the cost to Amoco of its Dome Petroleum shares, stating (at para. 110):

Because the full amount was due (although not due and payable or immediately exigible) one could assert that the assumed liability forms part of the Appellant’s cost of the shares of Dome Petroleum, for example, in much the same way that legal expenses incurred but not yet paid in connection with the execution of a purchase and sale agreement for shares are included in the cost of those shares. Having concluded that subsection 16(1) of the ITA does not apply, I am unaware of any provision in the ITA that requires a taxpayer to discount its obligation to pay a future principal amount when the liability to pay entails full recourse to the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 16 - Subsection 16(1) s. 16(1) operates symmetrically (no creditor interest – no debtor interest deduction) 412

The Armour Group Limited v. The Queen, 2017 TCC 65, aff'd 2018 FCA 134

payment made to ground lessor was capital expenditure for a capital asset (the ground leasehold interest)

An investment company (“Armour”), which was the lessee under a long-term ground lease from the Province of Nova Scotia, had constructed a building on the property and leased the building back to the Province. The Province then breached terms of the building lease and, in the subsequent settlement agreement, the parties agreed that the Province owed $2.4 million to Armour and that Armour, in consideration for $2.4 million to be paid by way of set-off, would be granted an irrevocable option to acquire the Province’s freehold interest (with the ground lease being terminated).

Armour had calculated that the present value of the remaining ground lease rentals was $2.24 million which, given that the settlement agreement agreed that the value of the whole property was $2.4 million, meant that the reversionary freehold interest of the Province had an FMV of $0.16 million. Armour then assigned the option to a wholly-owned subsidiary (“ADL”) along with the right to $0.16 million of the $2.4 million owing by the Province, with ADL agreeing as a condition of the assignment that it would provide a long-term ground lease of the property to Armour for nominal rents. Thus, at closing, Armour and ADL paid $2.24 million and $0.16 million, respectively, to the Province by way of set-off against the same amounts owing to them by the Province.

Armour took the position that the $2.24 million paid by it was fully deductible as consideration for the ground lease termination. Paris J instead found that what should be considered to have occurred was that Armour used all of the $2.4 million credit owing to it by the Province (which was not allocated under any of the agreements with the Province) to acquire the fee simple interest to the property on behalf of ADL and that, in exchange for that $2.4 million, Armour acquired the new (nominal-rent long-term) leasehold interest in the property from ADL Thus, the $2.4 million was a capital expenditure to acquire a capital asset (being such leasehold interest).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Contract or Option Cancellation structuring to deduct most of the cost of land (or a ground leasehold interest therein) was unsuccessful 537

Coast Capital Savings Credit Union v. Canada, 2016 FCA 181

no bifurcation of inflated purchase price between FMV cost and benefit conferral

The trustee of RRSPs was duped into purchasing shares of Canadian companies from offshore entities at a price substantially in excess of their value, so that funds of the RRSPs effectively were stripped to offshore accounts.

The trustee sought an amended pleading that the cost to it of the shares was their fair market value, apparently intending to argue that the “purchase price” in excess of the shares’ fair market value should instead be construed as the “conferral of a benefit to the annuitants and the promoters,” rather than as cost of the shares (so that s. 116(5) withholding only applied to the modest FMV). Gleason JA (like V. Miller J below) found that this approach (implicitly of bifurcation) flew in the face of the Stirling doctrine as to the meaning of “cost.”

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham deceit of taxpayer was irrelevant to assessment – so that “sham” also was irrelevant 268
Tax Topics - Income Tax Act - Section 116 - Subsection 116(5) rejection of apparent attempt to argue that an inflated purchase price should be bifurcated between a FMV cost and a benefit conferral 280

Turner v. The Queen, 2016 TCC 77 (Informal Procedure)

interest added to ACB

After finding that a retired professional engineer could not recognize, as a non-capital loss to be carried forward, his losses, including from interest expense, on plowing most of his money into an investment in a public corporation that then went bankrupt, and after having noted (at para. 14) the Crown’s position that the taxpayer’s carrying charges formed part of the adjusted cost base of his securities, Masse DJ stated (at para. 24):

[T]he Appellant…suffered losses in the form of carrying charges on money borrowed to purchase shares. These carrying charges can be considered as part of the cost of acquiring and disposing of the shares. They form part of the adjusted cost base of the shares and, if the shares are disposed of at a loss, then the carrying charges form part of the capital loss on the disposition of the shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss averaging-down investment in one public company not indicative of business 176

Kokai-Kuun Estate v. The Queen, 2015 TCC 217

interest carrying charges on vacant land not added to ACB

The taxpayer purchased 40 acres of vacant land in 1992 for $110,000, and allegedly incurred interest carrying charges of $179,000 up until its sale in 2006 for $370,000. Lyons J stated (at para. 45):

In Stirling, the Federal Court of Appeal held that interest on money borrowed to acquire property for the purpose of making a capital gain, rather than an income-earning purpose, is precluded, on disposition, from forming part of the cost of the property and cannot be added to the acb.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) failure to elect 135

Brosamler Estate v. The Queen, 2012 DTC 1193 [at 3493], 2012 TCC 204 (Informal Procedure)

probate fees added to cost

The estate of a deceased German resident sold three rental properties in BC. The estate added probate and legal fees that were paid in establishing the title of the estate to the properties to the adjusted cost base of the rental properties. The Minister denied the increase in adjusted cost base, and thereby reduced the estate's capital loss (which was deemed to be a capital loss of the deceased under s. 164(6).)

Webb J. found that as the fees were necessary in order for the estate to acquire a registrable interest in the properties, they were part of its acquisition cost. In the alternative, he noted that the fees could be characterized as outlays or expenses the estate incurred for the purpose of making a disposition of the rental properties, which would reduce the estate's proceeds of disposition under s. 40(1)(a), leading to the same capital loss that the deceased claimed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) probate fees to establisih title 134

Eskandari v. The Queen, 2007 DTC 1406, 2007 TCC 419 (Informal Procedure)

A fee that the taxpayer paid in connection with acquiring rights of an individual to purchase a condominium, with the taxpayer then acquiring the condominium, were part of the cost of acquiring the condominium.

Toronto Refiners & Smelters Ltd. v. The Queen, 2001 DTC 876 (TCC), aff'd 2003 DTC 5002, 2002 FCA 476

The taxpayer agreed to transfer its Toronto property to the City of Toronto with the compensation to be determined (under section 31 of the Expropriations Act) by the Ontario Municipal Board. It later was agreed that Toronto would pay compensation to the taxpayer of $2.9 million for the land, $0.1 million for the building and $9 million in respect of damages occasioned as a result of the inability of the taxpayer to relocate its business. The taxpayer treated the $9 million as a non-taxable capital receipt.

After noting that the character of the damages payment to the taxpayer turned on the actual circumstances of the payor (the City), Bell T.C.J. indicated that the total of $9 million of damages paid by the City would be added to the cost of the real property to it.

Graphic Packaging Canada Corp. v. The Queen, 2001 DTC 861 (TCC), aff'd 2003 DTC 5007 (FCA)

It was found that the taxpayer had acquired shares of a U.S. corporation ("GGM") on the basis of an undertaking that it would make payments to executives of a subsidiary of GGM when they became entitled to receive such payments under the terms of a profit sharing plan notwithstanding that this undertaking was not documented in the rollover agreement. Archambault T.C.J. found, on this basis, that the payment actually made by the taxpayer to such executives at the time it sold its shares of GGM to an arm's length purchaser were part of its cost of the GGM shares, with the result that it was entitled to deduct, in computing its capital gain on the disposition, the amount of such payments.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Superficial Loss 91

Bow River Pipelines Ltd. v. Canada, 2000 DTC 6090 (FCA)

The taxpayer received a 99.99% limited partnership interest on a rollover basis and then received the resource properties of the partnership in question when the partnership subsequently dissolved following the acquisition by the taxpayer of the remaining 0.01% general partnership interest. The Court found that the cost to the taxpayer of the resource properties was equal to the fair market value of the limited partnership interest prior to the dissolution of the partnership rather than its nominal cost.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(1) partnership deemed to continue until distribution 182

R. v. Inland Revenue Commissioners, Ex Parte Matrix Securities Ltd., [1994] BTC 85 (HL)

The following is a somewhat simplified description of transactions that would have occurred but for the withdrawal by Inland Revenue of an advance clearance:

  1. Investors purchased a leasehold interest in a property in a designated enterprise zone for 198 years from receiver-managers for the sum of £95 million, of which £64.125 million was borrowed on a 10-year full recourse and interest-bearing basis from a bank ("Hill Samuel"); the receiver-managers used £75.125 million of the amount received to pay a "reverse premium" to a subsidiary ("SQPL") of the promoter of the scheme ("Matrix") as the consideration for the previous agreement of SQPL to sublease the property for 99 years at a rent that, for the first 10 years of the sublease, was at an above-market rate; after payment of fees to Matrix and the funding of future construction costs, the receiver-managers retained £8 million of the £95 million received by them;
  2. SQPL lent £64.125 million to a subsidiary of Hill Samuel which, in turn, lent that sum to Hill Samuel; the balance of £8 million received by SQPL was used to pay a fee to Hill Samuel in respect of its guarantee of SQPL's obligations under the 99-year sublease, and to make a deposit with the subsidiary of Hill Samuel;
  3. rent for the initial 10 years under the 99-year sublease by SQPL was used to fund the interest payments owing by the investors on their loan from Hill Samuel; and
  4. an "exit arrangement" effectively permitted the investors after 10 years to cause the arrangement to be unwound at that time.

In finding that the scheme, if implemented, would not have entitled the investors to claim capital allowances on the full £95 million supposedly paid by them, Lord Templeman stated (p. 94)):

"The sum of £64.125m required to make up the fiscal price will never be paid by Hill Samuel and its subsidiary, by the trustee, the receiver and SQPL in such a manner that each receipt is matched by an equal and pre-ordained immediate payment. The circular payments are self-cancelling."

Glass v. MNR, 92 DTC 1759 (TCC)

Following the acquisition by the taxpayer of a mortgage owing by a corporation in financial difficulties, the taxpayer resorted to power of sale proceedings against the corporation but the shareholders of the corporation instituted proceedings in an attempt to obtain a permanent injunction prohibiting the sale of the secured property. U.S. $150,000 paid by the taxpayer to the other shareholders to discontinue those proceedings was found to have been paid as "an integral part of acquiring the mortgage and being able to use it to force a sale" (p. 1763) and, accordingly, formed part of the cost to the taxpayer of the mortgage.

Ensign Tankers (Leasing) Ltd. v. Stokes, [1992] BTC 110 (HL)

A limited partnership (the "Victory Partnership") of which the taxpayer was a member acquired from a Californian film company ("LPI") rights to a film which was in production. The Victory Partnership paid $3,250,000 toward the cost of the film and LPI agreed to lend to the Victory Partnership the funds required to complete the film. In finding that this supposed loan (which was repayable by the Victory Partnership only out of a share of receipts from the film) was not in fact a loan (with the result that the cost of the film to the Victory Partnership was found to be only $3,250,000 rather than the total cost of making the film of $14 million), Lord Goff stated (p. 129)):

  1. LPI continued to make the film as before, with all matters relating to the film (including cost) remaining under its control, and bearing the burden of any financial over-run beyond the approved budget of $13,300,000.
  2. The bank account into which money was to be paid by LPI was to be opened at a bank nominated by LPI, and no money was to be drawn from the account without the consent of LPI.
  3. When money was paid into the bank account by LPI, an identical sum was repayable by Victory Partnership to LPI out of the same bank account on the same day, leaving no balance outstanding at the end of the day's trading.
  4. By a non-recourse agreement, neither Victory Partnership nor any partner in Victory Partnership was personally liable for the repayment of the so-called loan.
  5. The so-called loan was repayable to LPI by payments out of the net profits of the film under arrangements which were inconsistent with the concept of a commercial loan.

Riendeau v. MNR, 85 DTC 665 (TCC)

Costs relating to the entertainment and telephoning of stock brokers were costs of acquiring or disposing of the taxpayer's securities.

Stanton v. Drayton Commercial Investment Co. Ltd., [1982] BTC 269, [1982] 2 All E.R. 943 (HL)

Where a taxpayer company satisfies, in accordance with a share purchase agreement, its obligation to pay for the shares it has acquired of a second company by allotting its shares to that second company, the cost base of the acquired shares is not the value or market value of the allotted shares but, in the case of an honest and straightforward transaction, the price upon which the parties have agreed.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares 60

MNR v. Enjay Chemical Co. Ltd., 71 DTC 5293, [1971] CTC 535 (FCTD)

The forgiveness of trade indebtedness owing by the taxpayer reduced the cost of inventory on hand at that time which it had acquired in the previous taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) 99
Tax Topics - Income Tax Act - Section 9 - Forgiveness of Debt debt forgiveness related to inventory of operations 178

Bentley v. Pike (1981), 53 TC 590 (Ch. D.)

A resident of the United Kingdom (Mrs. Bentley) in 1967 inherited an interest in German property having a value of DM 132,780, and in 1973 sold the property for DM 152,241. In the interim, the pound was devalued. Her capital gain was to be calculated by applying the 1967 exchange rate to the acquisition value and the 1973 exchange rate to the proceeds, rather than by applying the 1973 exchange rate to the amount of the gain in terms of deutsche marks. "The market value of the acquisition thus deemed to have taken place at her father's death ... can only be expressed for the purposes of the computation required to be made under the capital gains legislation in sterling, which is the only permissible unit of account."

Craddock v. Zevo Finance Co. Ltd. (1946), 27 TC 267 (HL)

A private investment dealing company, whose securities had declined substantially in value, transferred the more speculative of those securities to the taxpayer for a purchase price stated to be equal to their original cost and which was satisfied by the assumption of a debenture by the taxpayer and the issuance of shares. In rejecting the contention of Revenue that the cost of the securities to the taxpayer should be based on their fair market value at the time of acquisition rather than on the amount of the debenture and the par value at which the shares were issued, Lord Wright stated (pp. 289-290)):

"... The transaction was one for other than a money consideration, and the parties were free to make their own bargain. No authority were cited for the claim of the Revenue in a case like this to go behind the agreed consideration and substitute a different figure. ... If the Revenue are to have a power to exercise a general supervisory jurisdiction under Schedule D on the reasonableness of contracts or transactions, they must be invested with that power by legislation." [C.R: 9 - Computation of Profit]

Administrative Policy

2017 Ruling 2017-0699201R3 - Cross-border Butterfly

full cost of property acquired under 4-party exchange

CRA ruled on a cross-border butterfly which entailed assets of the “Transferred Business” being transferred indirectly to a wholly-owned non-resident subsidiary (Foreign Spinco) of a non-resident public company (Foreign Parentco) or to a wholly-owned non-resident subsidiary of Foreign Spinco (Foreign Spinco Sub) – with a view to the shares of Foreign Spinco being dividended out to the shareholders of Foreign Parentco at the transactions’ completion. One of the indirect assets of Foreign Parentco was a Canadian corporation (DC) which held the Canadian portions of both the Transferred Business and the “Retained Business.”

Following a s. 86 exchange by Foreign Parentco of its old common shares of DC for new common shares and “DC Special Shares”, and before the butterfly distribution to a Canadian subsidiary of Foreign Spinco Sub (TCo), there is a four-party exchange under which Foreign Parentco transfers its DC Special Shares to a newly-formed Canadian sub of Foreign Spinco Sub (TCo), TCo issues common shares to Foreign Spinco Sub, Foreign Spinco Sub issues shares to Foreign Spinco and Foreign Spinco issues shares to Foreign Parentco. CRA ruled:

[T]he aggregate cost to TCo of the DC Special Shares that TCo acquired from Foreign Parentco on the Four-Party Share Exchange will be equal to the aggregate FMV at that time of those DC Special Shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution cross-border butterfly with 4-party exchange and preceding distribution of DC to foreign parent to qualify as permitted exchange/rental property valued at nil/post-butterfly equaling cash payment 1056
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Permitted Exchange - Paragraph (b) cross-border butterfly including preliminary transfer of DC to foreing parent to come within “permitted exchange” 428
Tax Topics - Income Tax Act - Section 143.3 - Subsection 143.3(3) s. 143.3(3) inapplicable on a 4-party exchange 226
Tax Topics - Income Tax Act - Section 212.1 - Subsection 212.1(1.1) - Paragraph 212.1(1.1)(b) application on 4-party exchange 283

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

earnout payments an addition to cost of shares which had since disappeared

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….

Words and Phrases
cost
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 14 - Subsection 14(5) - Eligible Capital Expenditure payments made by Amalco in satisfaction of earnout obligation for acquisition of one precedessor by the other were not ECE 204
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

FMV cost of contributed or distributed property

CRA considered 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.

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 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
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital - Element A.1 no gain to FA transferor of ECP 93

11 October 2013 APFF Roundtable Q. 18, 2013-0495851C6 F - Safe income adjustments

downward adjustment under price adjustment clause reduces shares' ACB

Buyco acquired all the shares of Opco on 15 January 2010 from Sellco. A CRA audit resulted in a 2011 reasessment to increase Opco's income for its 2008 and 2009 years. CRA stated (TaxInterpretations translation):

In the situation where the agreement of purchase and sale contains an adjustment clause to the price for the shares payable by Buyco by reason of a reassessment sustained by Opco, the amount received by Buyco by reason of the price adjustment clause, in general, would reduce the acquisition cost of the shares of Opco.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) CRA post-closing reassessment of Target's pre-closing income changes its SIOH 364

10 June 2013 STEP Round Table Q. 10, 2013 0480411C6 (Brosamler decision)

CRA considers Brosamler Estate to be confined to "a very specific fact situation," noting that the legal and probate fees in issue would have been deductible in determining capital losses on the disposition of the properties regardless of whether they could be added to the property's ACB.

CRA's decision not to appeal reflects its general policy not to appeal decisions made under the informal procedure, rather than its views on the merits of the decision.

20 March 2013 External T.I. 2012-0442571E5 F - Coût d'acquisition d'un terrain

cost of land acquired from developer equal to total barter value minus amounts allocated to Classes 8 and 17

A developer acquired Land 1 from a Canadian-controlled private corporation (the “Corporation”) in exchange for cash and for land which the Corporation would use in its mobile home rental operation (Land 2), with the developer being required to first perform work so as to provide Land 2 to the Corporation in a serviced state. CRA stated:

With respect to the costs of water and sewer lines connecting mobile home units, they could constitute properties distinct from Land 2 and thus be included in Class 8… .

…In addition, costs related to parking areas could be included in Class 17(c) of Schedule II of the Regulations.

Consequently, the cost of Land 2 to the Corporation would be the difference between the value of Land 1 less the cash received for it, as well as the cost of other property acquired by the Corporation, including water pipes, sewer lines and parking areas.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 cost of water and sewer lines connecting mobile home units, included in Class 8 80

15 November 2012 External T.I. 2012-0461291E5 F - Frais judiciaires pour clarifier une servitude

no comment on whether legal costs to avoid expanded easement were ACB addition

The taxpayer incurred legal expenses in connection with a Superior Court action which defeated a claim of adjoining landowners that they had a larger easement over land of the taxpayer than reflected in the revised title. CRA did not answer the question posed as to whether these legal expenses could be included in the adjusted cost base of the land, and instead indicated that they did not qualify as a disposition expense under s. 40(1)(a)(i).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) costs of preventing an expanded easement on land were not a disposition expense 249

25 September 2012 Internal T.I. 2011-0409281I7 F - Papier commercial - Obligations XXXXXXXXXX

acquiring client securities at the clients' cost rather than their lower FMV was reflected in portfolio manager's cost

The corporate taxpayer, which was a portfolio manager, suspended transactions involving asset-backed commercial paper (ABCP) of its clients during the 2008 financial crisis, and subsequently agreed to purchase some of the client ABCP for its pre-crisis value. CRA found that the excess amount paid by the taxpayer for the purchases (which it reflected in its financial statements as an immediate loss) was not deductible under s. 9 and was not an eligible capital expenditure under s. 14(5). Instead (TaxInterpretations translation):

[T]he total of the amounts paid by the taxpayer to its clients for the ABCP was part of the cost of acquisition to the taxpayer of the ABCP. The acquisition cost is the cost established on the last day that, prior to the liquidity crisis, transactions related to ABCP could be made. Consequently, if they qualify as capital property within the meaning of section 54 and paragraph 39(1)(a), they cannot be included in computing the taxpayer's income under section 9.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss compensating clients for half their loss was currently deducible, whereas purchasing securities at original cost was its cost 150

17 October 2012 Ruling 2010-0376681R3 - Internal reorganization - 55(3)(a)

Before issuing favourable rulings, the letter notes that:

The purpose of two separate transfers of the PX 1 shares (one before the amalgamation and one after the amalgamation) is to avoid the averaging of the ACB of the shares held by both Opco and Holdco.

24 February 2004 External T.I. 2003-004493 -

Where a purchaser of land assumed an existing debt with a penalty payable in the event of early termination, the adjusted cost base to it of the land would not include the amount of the penalty (being a contingent liability).

2003 December 2, TEI Roundtable Q. 17, 2003-004858 -

"Where an asset is acquired by a corporation in exchange for shares of the corporation issued from treasury as a result of a transaction between the corporation and parties acting at arm's length with the corporation and the price of the asset is stated in the agreement governing the conveyance of the asset, it is our view that the cost of the asset will, subject to section 85, generally be equal to the price agreed to by the parties".

5 March 2003 External T.I. 2002-015145 -

Costs incurred by a purchaser in the course of a successful take-over of another corporation will be capital expenditures that should be added to the cost of the shares acquired irrespective of whether the purchaser intended to wind-up or amalgamate with the target corporation after the acquisition of the shares.

21 November 1997 T.I. 972798

Redetermination of the cost of the shares of a foreign corporation held by a Canadian parent as a result of a triangular amalgamation of non-resident corporations, where merger shares of the Canadian parent have been contributed to a predecessor corporation as part of the amalgamation.

3 October 1994 External T.I. 5-942411 -

A contingent right to have shares vested in a beneficiary of an employee profit sharing plan would not generally have any cost since that right is generally bestowed on the beneficiary gratuitously.

93 C.P.T.J. - Q.29

Although the definition of ACB does not preclude property other than capital property from having an ACB, transactions involving inventory or Canadian resource property are subject to specific provisions of the Act which are not governed by the concept of ACB.

15 October 1991 T.I. (Tax Window, No. 11, p. 8, ¶1525)

Capital sums received by a corporation in respect of damage to its land by drilling or exploring for oil and natural gas pursuant to a lease were to be ignored in computing the actual cost of the land to it for purposes of s. 88(2.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(2.1) 31

22 August 1991 T.I. (Tax Window, No. 8, p. 11, ¶1407)

The fees of a committee for an incompetent may be included in the ACB or the cost of disposition of the investments to the extent reasonably allocable to the purchase or disposition.

6 June 1991 Memorandum (Tax Window, No. 4, p. 22, ¶1283)

An account rendered to an owner of property for work completed by a contractor represents an amount which has been incurred by the owner and therefore may be included in the owner's cost notwithstanding that the owner is required to withhold part of the payment in order to comply with construction lien legislation.

13 May 1991 T.I. (Tax Window, No. 3, p. 25, ¶1230)

The fact that the individual vendor of the share receives a deemed dividend under s. 84.1(1) does not reduce the cost of the shares to the transferee.

5 March 1990 T.I. (August 1990 Access Letter, ¶1383)

Where an NRO ceases to be such by virtue of one of its shareholders becoming resident in Canada, the capital gain to the former NRO from the disposition of assets which are not taxable Canadian property will be based on the original cost of those assets to the corporation and not on the value of those assets at the time the shareholder became resident in Canada.

29 Aug. 89 Inter-Office Memo (Jan. 90 Access Letter, ¶1089)

Holdco owns two operating companies, Opco 1 and Opco 2, sells Opco 1 to a third party and at the same time Holdco and Opco 2 give the third party an option on Opco 2's business. Later, Opco 2 repurchases the option from the third party for $1 million. The adjusted cost base of the assets covered by the option thereby is increased by $1 million, i.e., the principle in IT-403, para. 3 is applicable.

89 C.P.T.J. - Q11

The cost to a purchaser of a gas property in carrying out the assumed take-or-pay obligation in respect of the property will represent part of its cost of acquiring the property.

87 C.R. - Q.42

Where a taxpayer has acquired an asset and the allowance given for a trade-in of the used asset exceeds its fair market value at the time of the trade-in, the capital cost of the new asset must be based on the fair market value of the asset traded in plus the amount of any cash or other consideration.

84 C.R. - Q.63

RC does not regard a "hedge cost" or "hedge premium" as a separate item, but instead takes it into account at the time of contract fulfillment.

IT-153R3 "Land Developers - Subdivision and Development Costs and Carrying Charges on Land"

Costs directly attributable to the development of land inventory, for example, legal, consulting, mortgage and survey fees, are added to the cost of the land in the taxation year incurred.