Canada: Supreme Court provides guidance on treatment of assumed liabilities in asset deals
The Supreme Court of Canada (SCC) tends to hear only a handful of tax cases each year. In its most recent tax decision, Daishowa-Marubeni International Ltd. v. Canada, the court offered some guidance on the treatment of assumed liabilities in the context of a Canadian asset sale. The case relates to the sale of forest tenures by the taxpayer and whether the taxpayer was required to include in its proceeds of disposition an amount for reforestation obligations assumed by the purchaser in connection with the transaction.
The Federal Court of Appeal (FCA) had held that the taxpayer's proceeds of disposition were required to include the agreed value of the reforestation obligations. In reversing the FCA, the SCC held that the reforestation obligations were not a distinct liability that could be separated from the forest tenures (the amount of which would have been included in proceeds).
Instead, they were a cost embedded in the tenures which served to depress their value. Accordingly, the assumption of those obligations by the purchaser did not give rise to additional proceeds of disposition. While not dispositive of the matter, the SCC recognised that an interpretation of the tax statute that promotes symmetry (as between the tax consequences to the purchaser and vendor) and fairness is preferred over one that results in asymmetrical treatment.
It continues to be good practice for parties to a Canadian asset deal to agree on an allocation of purchase price; a negotiated allocation between arm's-length parties should generally be respected by the Canadian tax authorities.
Parties should also be sure that the contract clearly sets out the amount of the purchase price as finally determined, including a clearly specified amount of any itemised liabilities to be assumed. Based on the SCC's decision, obligations assumed by a purchaser that are embedded in the assets purchased may not need to be separately itemised.
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