Canadian Tax Adviser
December 6, 2011

CRA Rules on Tax Treatment of Failed Takeover and Transaction Costs

Evy Moskowitz
Toronto, Moskowitz + Meredith LLP

In a recent internal technical interpretation (TI), CRA Rulings was asked to comment on 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". 

Acquisition costs
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 ECE, under 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.

Transaction costs
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 International Colin Energy cases.

Takeover costs
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 18(1)(b).

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