See Also
Ritchie v. The Queen, 2018 TCC 113
A farmer, who rented his farm to his corporation, received an early “signing bonus” of $255,790 from Enbridge for entering into an agreement with Enbridge by the stipulated deadline under which he granted an easement for a pipeline to Enbridge. The Agreement stipulated that the $255,790 was “an incentive for early signing of the easement agreement” rather than part of the (separately stipulated) compensation for the easement.
Notwithstanding this clause, D’Arcy J found that in substance, the “signing bonus” was part of the taxpayer’s proceeds of disposition for disposing on an interest in land (the granting of the easement) and, thus, gave rise to a capital gain.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subpargraph 12(1)(x)(viii) | an early signing bonus was part of the proceeds of disposition of the subject property | 307 |
Deragon v. The Queen, 2015 TCC 294
The taxpayer and two other trusts (the “vendors”) agreed effective May 1, 2004 to sell shares of various private companies (the “companies”) for a purchase price of $16 million minus long-term debts of the companies. $2 million of the sale price was receivable over three years provided that EBITDA of the companies was not less than 75% of the EBITDA for the fiscal year ending on January 31, 2003. A price adjustment clause provided for an increase or decrease in the sale price based on the increase or decrease in shareholders’ equity reflected in the balance sheet for the year ended January 31, 2004. In 2005, the parties realized that due to a failure to provide for accrued vacation pay and tax liabilities in the financial statements of the companies, the shareholders’ equity as at January 31, 2004 had decreased by $2.43 million.
After arduous negotiations, it was agreed on July 14, 2005 that the gross sale price would be reduced by $0.5 million to $15.5 million, that the conditional sale portion of the sale price would be increased by $1 million to $3 million and that the vendors would under stipulated conditions reimburse the following amounts to the purchaser: the sum of $1.5 million; a further sum of $0.5 million which theretofore had been held in trust for them; and the conditional sale amounts of $0.6 million per annum (i.e., $3 million in total). However, only a portion of these amounts was paid back by the vendors.
In confirming the Minister’s position before him that the vendors’ proceeds of disposition were based on the sale price as reduced only by the $0.5 million adjustment thereto under the Settlement Agreement (as contrasted to the taxpayer's position that its proceeds shuld be reduced to reflect an contingent obligation to refund a larger poriton of the sale price), Favreau J stated (at paras. 31-34):
[T]he conditional portion of the sale price for the shares was part of their proceeds of disposition.
…[T[he Settlement Agreement stipulated that, notwithstanding the adjustment clause, the total sale price of the shares would be $15,500,000 rather than $16,000,000. Consequently, the total sale price of the shares of $15,500,000 has become, following the adjustment, the maximum amount which can be received by the vendors from their sale of their shares.
The increase in the conditional sale balance from $2,000,000 to $3,000,000 and spread over five years rather than three years…did not impact on the total sale price of the shares as the conditional sale price was part of the total sale price of the shares… .
The $15,000,000 which the [vendors] were required to reimburse under the Settlement Agreement cannot detract from the total sale price of the share because it was contingent and dependent on the realization of the EBITDA condition respecting the companies.
He also noted that the taxpayer had relied on IT-462, para. 9 to avoid income treatment of the proceeds under s. 12(1)(g).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) | reverse earnout amounts included in proceeds | 245 |
| Tax Topics - General Concepts - Effective Date | proceeds reduced by subsequent settlement pursuant to price adjustment clause | 205 |
Administrative Policy
23 March 2011 Internal T.I. 2010-0389081I7 F - Disposition of a resource property
The Vendor sold a percentage interest in mineral claims (the “Mining Properties”) for consideration including deferred cash payments and shares to be issued by the public-company Purchaser, in each case, to be paid or issued over a four-year period.
After noting that a Dictionary definition of “sale price” included “Amount paid for a thing purchased,” the Directorate indicated that the full amount of the deferred cash payments (rather than discounted amounts) should be included in the Vendor’s proceeds of disposition under F in the definition of CCDE in s. 66.2(5). Turning to the deferred share issuance consideration, the Directorate noted that the shares’ market price could “fluctuate greatly,” and indicated that the TSO accordingly might:
conclude that such portion of the proceeds of disposition for the Mining Properties by the Vendor is not determinable prior to the date of issuance of the shares by the Purchaser and that such portion of the proceeds of disposition would be recognized for tax purposes at the times of their issuance … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - cumulative Canadian development expense - Element F | proceeds from mineral claims sale included undiscounted deferred cash proceeds, but might exclude share consideration until issued; purchaser’s CEE obligation excluded | 390 |
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) | deferred share consideration potentially not recognized until issuance | 103 |
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) | full undiscounted amount of future cash consideration to be included as an amount receivable | 209 |