On September 23, 2011, the Federal Court of Appeal (the
"FCA") released the highly anticipated
decision in Daishowa-Marubeni International Ltd. v. The
Queen (2011 FCA 267). The decision of the FCA is of key
importance in the mining, forestry, and oil and gas context, where
the assumption of reforestation and reclamation liabilities is part
and parcel of the sale of properties.
In this case, the corporate taxpayer
("Daishowa") sold two of its forestry
divisions. As part of each of the divisions, Daishowa held timber
rights, which gave rise to certain reforestation liabilities. The
Purchase and Sale Agreement provided the following: a purchase
price of $169,000,000 for the assets; the net working capital (as
adjusted); and the assumption by the purchaser of $11,000,000 in
reforestation obligations, plus or minus "any difference
between a preliminary and a final estimate" of the
reforestation obligations. The FCA noted that Daishowa admitted
that the purchase price would have been greater if the purchaser
had not assumed the reforestation liabilities.
The FCA held that the assumption of the reforestation
obligations constituted additional proceeds of disposition of
"timber resource property", which is treated as
depreciable property for purposes of the Income Tax Act
(Canada). Daishowa's argument that the $11,000,000 was simply
an estimate and not an agreed upon value of the reforestation
obligations was denied by the FCA.
Rather, the FCA held that, based on an interpretation of the
contract, the parties had agreed that the value of the
reforestation liability was $11,000,000 and therefore the entire
$11,000,000 should be included in Daishowa's proceeds of
disposition. According to the FCA, the issue in circumstances of
this kind is whether the obligation assumed can be valued. As a
result, if the parties do not assign a value to the reforestation
or reclamation obligations, then presumably there is no amount to
include in the vendor's proceeds of disposition.
This case has a broad impact with respect to any sale of a
business where pension, severance and other obligations are assumed
by the purchaser and a value is assigned to the assumption of those
obligations. Taxpayers should consider this case and its
implications when drafting purchase and sale agreements, as well as
with respect to sale transactions that have already occurred.
Further, this case may create additional complications for
purchasers who assume certain obligations and an amount is assigned
to such obligations as part of the transaction. Presumably, based
on the FCA's decision, the assumption of such obligations may
form additional cost of the properties acquired, although the
timing of the addition to the cost of the properties is unclear. At
this time, it is uncertain whether leave will be sought to appeal
the decision of the FCA to the Supreme Court of Canada, or whether
leave to appeal would be granted.
Please follow the link
here for a more detailed analysis of this decision.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
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