On May 23, 2013, the Supreme Court of Canada (the
"SCC") rendered its much anticipated
decision in Daishowa-Marubeni International Ltd. v. The Queen, 2013
SCC 29 involving the taxation of assumed reforestation obligations.
This decision, which was favourable to the taxpayer, should be of
particular interest to forestry, mining, oil and gas and real
estate companies that have entered into asset purchase agreements
in which the purchaser assumes responsibility for reforestation,
rehabilitation or reclamation obligations.
Daishowa-Marubeni International Ltd.
("DMI") sold two Alberta pulp mill
businesses to third parties in two separate assets sales, for a
purchase price of $169 million and $6.1 million, respectively.
Included among the assets were forest tenures that allowed the
holder thereof to cut and remove timber from an area of land owned
by the province of Alberta. These tenures imposed a future
obligation on the owner to reforest lands covered by the tenure. At
no point during the time in which it held the tenures did DMI claim
a tax deduction for the estimated future reforestation obligations,
although it did maintain a reserve in respect of those future
obligations on its balance sheet as required under accounting
Under provincial rules, the tenures could not be transferred
unless the associated reforestation obligations were also assumed
by the new owner. Thus, the parties estimated the cost of each
reforestation obligation and reduced the purchase price
accordingly. A contingent amount of approximately $11 million was
specified in the purchase agreement for the larger mill, with the
parties agreeing to make adjustments if a final estimate of the
reforestation obligations was higher or lower than the preliminary
estimate. For the smaller mill, the purchase agreement did not
specify an estimated cost of performing the reforestation
obligations, although DMI had taken an accounting reserve of
approximately $3 million in respect of such future costs.
When reporting the asset sales for tax purposes, DMI did not
include the estimated amounts of the reforestation obligations in
its proceeds of disposition. The Minister reassessed DMI to include
such amounts in respect of both sales. More specifically, the
Minister's position was that the obligations assumed by the
purchaser were part of the sale price to DMI but not part of the
purchase price to the acquirer.
DMI appealed to the Tax Court of Canada (the
"TCC"), where it was largely
unsuccessful. The TCC did, however, hold that a discounted value of
the estimated reforestation obligation (rather than the full value
specified in the purchase agreements and/or the financial
statements) should be included as proceeds. The Federal Court of
Appeal (the "FCA"), in a two-to-one
decision, also ruled against DMI, but held that DMI was required to
include the entire estimated cost of the reforestation obligations
in its proceeds of disposition.
The SCC, in a unanimous judgment, reversed the decision of the
FCA and held that DMI was not required to include any estimated
cost of reforestation in its "proceeds of disposition"
for tax purposes. The Court held that the reforestation obligation
was not a distinct existing liability, but rather was
"embedded" in the timber rights by virtue of the Alberta
regime. As such, the reforestation obligations were simply future
costs that reduced the value of the timber rights (i.e., more akin
to anticipated future repairs on a building than a mortgage
encumbrance). That the parties agreed to an estimated future cost,
and that DMI may have previously estimated such future costs for
accounting purposes, were both immaterial considerations.
Interestingly, the Court also held that the element of contingency
was also immaterial: as a general rule, "embedded"
obligations should be excluded from proceeds of disposition
regardless of whether such obligations are contingent or
The SCC noted that its conclusion avoided the fundamental
asymmetry in the Minister's approach, which would tax the
vendor as though the reforestation obligations so assumed were part
of the sale price, while taxing the purchaser as though they were
This decision is a significant victory for the taxpayer
involved, and should provide comfort to similarly situated
taxpayers in the mining, forestry, oil and gas and real estate
industries, where the assumption of reforestation and reclamation
liabilities is especially common. Examples might include real
estate properties sold where liabilities for future environmental
reclamation or building code rectifications are factored in to the
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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