Proposed section 143.4 of the Notice of Ways and Means Motion
(NWMM) is a legislative response to the decision of the Federal
Court of Appeal in Collins v. The Queen,  3 CTC 100
(FCA) (leave to appeal SCC denied 2012 CarswellNat 5845)
("Collins"). In that decision,
accrual-based taxpayers were permitted a deduction for accrued but
unpaid interest expense notwithstanding the existence of a right to
settle the obligation (including accrued but unpaid interest)
through payment of a substantially lesser amount. The
proposals were first introduced in draft legislation dated March
16, 2011 (the "March 16, 2011 Proposals") (summarized in
Budget Briefing March 22, 2011) and remain substantially
unchanged in the NWMM despite concerns raised by the CBA-CICA Joint
Committee on Taxation (the "Joint Committee") in a letter
dated November 7, 2011 (the "letter").
Generally, proposed section 143.4 provides that, for taxation
years ending after March 15, 2011, the amount of a taxpayer's
expenditure (which includes an expense, expenditure or outlay made
or incurred by the taxpayer, or the cost or capital cost of
property acquired by the taxpayer) is reduced to the extent that
the taxpayer or a non-arm's length person has a right to reduce
or eliminate an amount in respect of the expenditure (less any
amount paid by the taxpayer to obtain such right or any limited
recourse amount that otherwise reduced the expenditure), including
a contingent right if it is reasonable to conclude having regard to
all circumstances that the right will become exercisable. If
a taxpayer later pays all or a portion of a contingent amount, then
the taxpayer will be considered to have incurred the previously
reduced expenditure (to the extent it was paid). The
proposals also address the situation in which expenditure becomes
contingent at a later date (including a specific anti-avoidance
provision). The proposals also provide that any necessary
assessment, determination or redetermination may be made
notwithstanding applicable statutory reassessment periods.
In the letter, the Joint Committee commented that the rules were
more expansive than necessary to address the policy concern
represented by the decision in Collins and could be
construed to apply in respect of a broad range of legitimate
commercial arrangements and would introduce significant uncertainty
for taxpayers. Notwithstanding these concerns, the rules are
substantially unchanged in the NWMM. The only substantive
change is to exclude limited recourse amounts that already reduced
an expenditure from the reduction on account of contingent amounts
(to avoid double-counting). As the scope of these proposals
extends beyond the circumstances in issue in Collins,
taxpayers need to consider the potential application of these rules
in any circumstance in which a taxpayer may have a right to reduce
any amount in respect of an expenditure (contractually or
otherwise) and other relevant circumstances.
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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