Price is important. What a purchaser pays can mean a lot. How
much HST/GST/PST is payable? What is the land transfer tax? Has
there been a gain/profit for income tax purposes? What is the value
that gets "booked" by the purchaser? So how do you figure
out the price when the buyer is required to take on some future
expense as part of the deal to buy a forestry, mining or oil and
The May, 23 2013 Supreme Court of Canada decision in
Daishowa-Marubeni International Ltd. v. The Queen
(DMI) dealt with whether reforestation obligations that were
assumed by a purchaser needed to be included in reporting the
purchase price received by DMI. In the words of Justice Rothstein
(in a rare and better than average attempt at Supreme Court
humour), "In this appeal, the Court is called upon to answer
the age-old question: If a tree falls in the forest and you are not
around to replant it, how does it affect your taxes?"
In 1999 and 2000 DMI sold two of its forestry divisions to two
different purchasers. In each case part of the purchase price was
allocated to the value of the forestry licences held by each
division. The licences each carried outstanding reforestation
obligations that were being assumed by the respective purchasers.
The first agreement included an estimated value of current and long
term reforestation obligations at $11 million. The second agreement
did not include such an estimate.
DMI never deducted costs for future reforestation obligations as
it reported its annual income for tax purposes while it operated
the divisions. When DMI sold the divisions, it did not report any
amount in respect of future reforestation costs assumed by the
purchasers as part of the sale proceeds it received. The Minister
of National Revenue (that other "MNR") reassessed DMI and
tacked on about $14 million to the proceeds of disposition,
representing the estimated reforestation obligations assumed by the
two purchasers. DMI appealed.
The issue before the Court was, "... whether the
purchasers' assumption of the reforestation obligations arising
from DMI's previous harvesting is included in the sale price of
the forest tenure."
MNR likened taking on the reforestation obligations to buying a
property and assuming an existing mortgage; there is no question
that the amount of an assumed mortgage forms part of the purchase
price. DMI (backed by a cast of resource industry interveners) said
that the obligations were costs that were imbedded in the licences
- like the cost of needed repairs in the value of a house - that
depress the value of the licences. In fact, in Alberta forest
tenure is only transferrable with consent of the Province and
consent depends on the purchaser agreeing to assume all
reforestation obligations (at which time the seller is released of
The Court agreed with DMI. A $1 million house with a $400
thousand mortgage could always be sold for $1 million because a
purchaser does not need to assume the mortgage, but a $31 million
forestry tenure with an $11 million reforestation obligation would
never sell for more than $20 million because the obligation is
always included in the package. As Justice Rothstein put it,
"To include the full $31 million in DMI's proceeds of
disposition would disregard the fact that DMI did not have $31
million of value to sell. Under no circumstances could DMI have
received $31 million for the forest tenure."
The Court also commented on the lack of "symmetry" in
the tax treatment of DMI and the purchaser. Notwithstanding that
MNR wanted DMI to claim $31 million as the proceeds of disposition,
it admitted that it was not going to allow the purchaser to include
the $11 million in assumed reforestation costs as part of its
adjusted cost base. As DMI pointed out, that would mean that the
purchaser could sell the forestry tenure the next day at its market
value of $20 million but it would get taxed on a sale price of $31
million (and only be able to claim a cost of $20 million). The
Court stated that where there are two different interpretations of
a tax provision, the interpretation that is consistent with the
principle of symmetry should be preferred.
Not in the forestry business? Well, think of rehabilitation
obligations that come with mining and oil and gas developments.
These obligations are typically assumed by the purchaser and often
as a condition of any government approved transfer. Think of
properties where the buyer assumes legal environmental cleanup
liability. The DMI decision suggests that these costs, when
assumed, are not part of the price. (Now remember, this is an
article; get specific legal advice before you hang your hat on
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).