The Supreme Court of Canada recently released a decision which
overturned previous court decisions and confirmed that the
assumption of reforestation liabilities by a purchaser does not
constitute additional sale proceeds to the vendor if the
liabilities are embedded in the underlying timber rights. This
decision is also of particular importance to other resource
sectors, where purchasers typically assume reclamation and other
The case of Daishowa-Marubeni International Ltd. v. The
Queen involved a vendor (Daishowa) that sold a forestry
division, which included timber rights that gave rise to certain
reforestation obligations. The agreement set out a purchase price
of $169,000,000 and the assumption by the purchaser of
reforestation obligations of $11,000,000 (subject to adjustment
based on a post-closing estimate). The lower courts had held that
the purchaser's assumption of the reforestation obligations
constituted additional proceeds of disposition upon which the
vendor was taxable, although the Tax Court had discounted that
amount on account of the uncertain nature of the reforestation
The Court's Decision and the
The Court noted that the assumption of a vendor's liability
by a purchaser may give rise to additional proceeds to the vendor
depending on the circumstances. However, the Court held, in a
unanimous decision, that the reforestation obligations were a
future cost embedded in the timber rights and depressed the value
of the timber rights. The reforestation obligations were not a
distinct liability and could not be severed from the timber rights.
The Court considered the reforestation obligations to be more akin
to repairs required on a building, rather than to a mortgage that
is a separate existing liability that does not impact the value of
the property. In support, the Court observed that commercially the
vendor could not have received more than the agreed purchase price
(i.e., $169 million minus the equipment and related
assets) for the timber rights.
The Court indicated that it is irrelevant whether or not the
parties agreed on an amount for the reforestation obligations.
Further, the Court noted that its approach avoided the asymmetrical
tax treatment where any additional sale proceeds arising due to the
assumption of obligations would be taxable to the vendor but would
not give rise to an increased cost basis in the property for the
This decision was eagerly anticipated due to its potential
impact on various resource sectors, where the assumption of
obligations is part and parcel of the sale of properties. The
finding that the reforestation obligations were embedded in the
timber rights was based on applicable law and policy that
effectively required the purchaser to assume the vendor's
reforestation obligations in order for the transfer to receive
government approval as required by applicable legislation and to
relieve the vendor of future liability for those obligations. The
Court specifically left open the possibility that certain
liabilities may be embedded in the property where the purchaser is
not required by law or government policy to assume those
liabilities on the transfer of the underlying property. This is
relevant to other resource sectors where purchasers generally
assume certain reclamation or other obligations, but where there
may be different legislative schemes in place.
The Court noted that whether the reforestation obligations were
"contingent liabilities", which had been addressed by the
lower courts, was also irrelevant. The assumption of the
reforestation obligations was excluded from the purchase price due
to the embedded nature of such liabilities and independent of
whether the liabilities were absolute or contingent. However,
various types of obligations are assumed by a purchaser in asset
transactions. Whether an obligation assumed by a purchaser is
contingent may be relevant for assumed obligations that are not as
clearly tied to a particular asset, such as pension, severance and
tort obligations. The considerations for those types of
assumed obligations will also likely be different as the parties
may not agree to an estimate of those obligations.
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.
The Government of Alberta recently announced a number of policy changes that will impact the Alberta Electricity Market, composed of its generators, transmitters, distributors, retailers, electricity consumers and wholesale electricity market.
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