May 24, 2013
Supreme Court Decision Eases Concerns in Natural Resource Industry
A collective sigh of relief was heard in the natural resource industry in Calgary and other parts of the country upon the release of the much-anticipated decision of the Supreme Court of Canada in Daishowa-Marubeni International Ltd. v. The Queen on May 23, 2013. In a unanimous decision of all nine Supreme Court Justices, the top Court firmly rejected the proposition that estimated future expenses relating to reforestation obligations assumed by the purchaser of a forest tenure were to be included in the seller’s proceeds of disposition for tax purposes.
Supreme Court reasoning
The Court described its decision as being a choice between two analogies. On one hand, the reforestation obligations associated with forest tenures could be envisioned like mortgages on real property (as the CRA argued). The assumption of a mortgage by a purchaser of real property is considered to be part of the purchase price of the property. On the other hand (as the taxpayer argued), a forest tenure with accrued reforestation obligations could be seen like a property in need of repair — the accrued liabilities reduce the value of the tenure, as outstanding repairs reduce the value of a property.
The Court solidly preferred the “property-in-need-of-repair” analogy. The Court noted that a mortgage does not reduce the value of a property itself — the property’s value is the same with or without a mortgage. A seller can sell the property for a cash payment equal to the full value of the property and repay the mortgage or transfer the property for a lesser cash payment and have the purchaser assume the mortgage. By contrast, the Court found that the applicable regulatory scheme (which prevents a seller from selling a forest tenure without also assigning the reforestation obligations arising from past harvesting) had the impact of embedding the reforestation obligations in the forest tenure and in its value. Thus, because the reforestation obligations affect the value of the forest tenure (by depressing it), they are distinguished from the mortgage analogy.
Although the decision specifically addresses forest tenures and the regulatory scheme applicable to forest tenures, the Court implied (in, arguably, non-binding comments) that such a regulatory scheme requiring the assumption of obligations by the purchaser may not be necessary to arrive at the same result.
The Court also emphasized that its conclusion resolved the CRA’s proposed inconsistent treatment of sellers and purchasers. The inconsistency, or asymmetry, arose because the CRA's approach taxed the seller at the time of sale as if the reforestation obligations assumed by the purchaser were part of the sale price, but taxed the purchaser as if they were not part of the purchase price since they were not included in the purchaser’s adjusted cost base. This inconsistent tax treatment of sellers and purchasers and the potential for double tax appeared to be a significant concern for the Court.
The application of the decision to the oil and gas industry should be immediate. Oil and gas properties are customarily sold in circumstances where abandonment and reclamation liabilities are assumed by the purchaser and historically are considered by industry participants to affect the value of the property. Although the regulatory regime for oil and gas is not identical to the regulatory regime for forest tenures, the similarities between reforestation obligations and abandonment and reclamation obligations in the oil and gas context cannot be ignored or denied. Abandonment and reclamation obligations should be considered embedded in the value of oil and gas properties just as the reforestation obligations are now considered embedded in the forest tenures.
Impact on mining industry
The Court’s decision should be good news for the mining industry as well. If the CRA had been successful, it could have extended its position that reclamation costs should be included in proceeds of disposition to all industries and the mining industry in particular.
We can help
Your KPMG adviser can help you assess the effect of the Court’s decision on your business, and point out ways to take advantage of any benefits arising from the decision or help mitigate its impact. For more details on this decision and its potential impact, contact your KPMG adviser.
Information is current to May 24, 2013. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG member firms around the world have 145,000 professionals, in 152 countries.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
KPMG's Canadian Web site is located at http://www.kpmg.ca/
© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.