Canadian Tax Adviser
December 6, 2011
CRA Rules on Tax Treatment of Failed Takeover and
Toronto, Moskowitz + Meredith LLP
In a recent internal technical interpretation (TI), CRA Rulings was asked to
the income tax treatment of certain costs related to merger and acquisition
transactions. The costs in question were acquisition costs,
transaction costs and takeover costs. Unfortunately, because the facts of this internal technical
interpretation are unclear, it is difficult to contextualize CRA
Rulings' position on these costs.
Citing relevant jurisprudence, CRA Rulings stated that its long-standing
position is that "expenditures incurred in an unsuccessful
transaction will be accorded the same treatment as if the transaction had
been successfully completed".
In the TI, CRA Rulings said that Purchaserco's attempted acquisition of Targetco's shares
and the subsequent combination of their business operations would have
resulted in the acquisition of capital property, such
that the transaction would be a capital transaction. Thus, Purchaserco's
costs related to the attempted takeover would be on
capital account and would not be deductible on a current basis because of
the restriction under paragraph 18(1)(b).
As a result, CRA Rulings concluded that Purchaserco is only entitled
to a deduction for the acquisition costs, and only to the extent allowed under
paragraph 20(1)(b). This rule requires that the costs qualify as an eligible
capital expenditure (ECE), as defined in subsection 14(5). CRA Rulings
found that the costs were incurred for purposes of earning income from
Purchaserco's business and thus the acquisition costs should be considered
paragraph 23 of IT-143R3, "Meaning of Eligible Capital Expenditure", and paragraph 36 of BJ Services Company, which discusses whether an expenditure qualifies as ECE.
CRA Rulings noted that it appears that the negotiations on combining Purchaserco's and Targetco's businesses
were conducted in circumstances
similar to those in BJ Services Company. In that case, the Tax Court of Canada
(TCC) found that the costs were deductible when computing income under
subsection 9(1). CRA Rulings also said that a ruling that the transaction
costs were on account of capital would be contrary to BJ Services Company and
Colin Energy cases.
CRA Rulings said that Purchaserco could deduct the costs it incurred for
obtaining professional advice and communicating the proposed transactions
with its shareholders as current expenses
under subsection 9(1).
The takeover costs also include payments made to employees for
surrendering vested stock options for cancellation. CRA Rulings noted
that the decision in Imperial Tobacco should apply, as the stock option buyout costs were on capital account and
were therefore not deductible because of the restriction in paragraph
For more information, contact your KPMG adviser.