The tax treatment of obligations assumed or inherited by a buyer of property continues to be an area of uncertainty, as is illustrated by the recent split decision of the Federal Court of Appeal in Daishowa-Marubeni International Ltd. v. The Queen. The Tax Court of Canada, the majority of the FCA and the minority all came to different conclusions about how much a vendor of forested lands should include in its proceeds of disposition in respect of reforestation obligations attached to the property and inherited by the buyer.
The FCA majority concluded that the parties had attributed a value of $11 million to the relevant liability and that amount (whether or not reflecting the “true” amount of the obligation) should therefore be included in the vendor’s sale proceeds for tax purposes. According to the majority, whatever number the parties put on an assumed liability governs the vendor’s proceeds for tax purposes. The minority’s conclusion that no amount should have been included in the vendor’s proceeds for the purchaser inheriting an obligation that ran with the land and which simply reduced the value of the underlying property seems more logical. However, unless the Supreme Court of Canada hears an appeal and overturns the majority’s decision, this case will govern the treatment of obligations assumed by a purchaser of property.
While this decision is of particular importance in the natural resource sector (mining, forestry and hydrocarbons), it potentially applies to assumed and inherited obligations in all types of business transactions. Daishowa demonstrates how important it is to think about the tax treatment of transactions at the earliest possible stage and ensure that the documentation reflects whatever tax result the parties are trying to achieve. Click here to read the full analysis of this decision.