Words and Phrases - "option"
Armour Group Limited v. Canada, 2018 FCA 134
A bare trustee (“FSL”) for the taxpayer (an investment and real estate company) had received a ground lease of property in downtown Halifax (“Founders Square” or the “Property”) from the Province (until 2064 at $100,000 per year for the first 10 years, and percentage rent thereafter) and with FSL leasing a building it had constructed on its leased interest to the Province. After FSL had subsequently sued the Province for reducing the space that was leased by it, the action was settled by the Province agreeing that it was liable for $4,456,250, which would be satisfied in cash by paying FSL $2,056,250 and, as to $2,400,000, by granting an irrevocable assignable option (the “Option”) to FSL to purchase Founders Square (which had a fair market value of $14 million), together with an assignment of the Ground Lease in favour of FSL, with the $2.4 million exercise price to be paid by way of set-off against the $2.4 million amount owing by the Province to FSL under the settlement agreement.
FSL assigned the Option to a wholly-owned subsidiary of the taxpayer’s parent (“ADL”) on condition that ADL grant FSL a new ground lease on the same terms as the previous one except for a nominal rent. FSL assigned $160,000 of the $2.4 million amount, that it was entitled to receive under the settlement agreement from the Province, to ADL in consideration for an ADL promissory note. On the same date as the exercise of the option by ADL (resulting in the Province transferring the fee simple interest in Founders Square to ADL), FSL purported to surrender the existing ground lease to the Province pursuant to a surrender agreement which stated that the consideration provided by FSL thereunder to the Province was “$10.00 and other good and valuable consideration.” ADL and FSL also entered into the new ground lease. The taxpayer (which had calculated that $2.24 million was the present value of the remaining lease payments under the terminated ground lease) treated $2.24 million of the amount paid on its behalf by FSL as a lease cancellation fee, and deducted this amount in full in computing its income.
After discussing authorities establishing that “the exercise of an option must lead to a binding contract of purchase and sale,” Webb JA noted (at para. 34) that if it were assumed that the ground lease was surrendered immediately before the Property was conveyed to ADL, it would follow that ADL acquired the Property (which had a value of $14 million) under the option, which would be tantamount to ADL having by virtue of the option exercise accepted the offer of the Province to sell the Property and to have become obligated to pay the purchase price of $2.4 million. As all of the $2.4 million was paid to the Province (by way of set-off) as Property purchase price, it followed that none of this amount was paid as a ground lease surrender payment.
On the other hand, if the ground lease surrender and the ADL acquisition of the Property were regarded as having occurred simultaneously, it also would not be apparent why any portion of the $2.4 million should be regarded as a lease surrender payment rather than as purchase price.
Accordingly, none of the claimed $2.24 million was deductible.
7 March 2016 External T.I. 2015-0608211E5 - Assignment of right to purchase
Would an assignment to a trust by a non-resident person of a right to purchase a Canadian apartment unit be considered a disposition of taxable Canadian property? CRA responded:
According to Black's Law Dictionary 9th Ed, “option” includes the right to buy an asset at a fixed price within a specified time. Based on this definition, the right to purchase an apartment should be considered an option for purposes of the Act.
…“[A]ssignment” is a form of “transfer”, and therefore, provided all other conditions of the definition are met, the assignment of the right to purchase the apartment to a trust would be considered a disposition.
Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187
Before finding that a clause in a lease giving the lessee the unilateral right to compel the lessor to sell helicopters to the lessee at their reasonable fair market value was an "option", Major J. stated his agreement with the following list of the three principal features of an option:
- exclusivity and irrevocability of the offer to sell within the time period specified in the option;
- specification of how the contract of sale may be created by the optionholder; and
- obligation of the parties to enter into a contract of sale if the option is exercised.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 49 - Subsection 49(3) | 143 |