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Federal Tax - Income. Glencore Canada Corporation v. Canada
In Glencore Canada Corporation v. Canada (Fed CA, 2023) the Federal Court of Appeal considered a second appeal (first was from the Tax Court) of the tax categorization status of 'non-completion fees' that the taxpayer received on the failure of it's auction bids to purchase shares of another corporation.
In these quotes the court considers the inclusion of payments as 'Income inclusions - Inducement, reimbursement, etc.' [under ITA s.12(1)(x)]:G. Issue 3 – Should the Fees be included in computing income pursuant to s. 12(1)(x)?
[45] The main position of the Crown in this appeal is that the Fees are income from a business pursuant to Ikea. In the alternative, the Crown submits that the Fees are income pursuant to s. 12(1)(x) of the Act either as an inducement or a reimbursement. This alternative argument was not discussed by the Tax Court.
[46] Paragraph 12(1)(x) was enacted pursuant to a proposal in the federal budget of May 22, 1985. The proposal is described in the budgetary supplementary information:It is a generally accepted commercial principle that the cost of an asset or the amount of an expense should be reduced by any reimbursement or similar payment received that relates to the acquisition of the asset or the incurring of the expense. For example, a commercial tenant who was reimbursed by a landlord for part or all of the cost of making leasehold improvements would subtract the payment in computing the cost of such property. A similar result would arise with respect to manufacturers’ rebates.
Recent court decisions have indicated that this principle may not apply for income tax purposes.
The budget proposes to require that all payments in the nature of reimbursements or inducements in respect of the acquisition of an asset or the incurring of a deductible expense be included in income for tax purposes unless the recipient elects to reduce the cost basis of the related property or the amount of related expense. This would apply to payments received after May 22, 1985 other than payments received under an agreement in writing made on or before that date. The law already specifically requires similar treatment for certain payments received as government assistance for the acquisition of property. At paras 47-73 the court further considers the facts of the case in light of ITA s.12(1)(x).
. Glencore Canada Corporation v. Canada
In Glencore Canada Corporation v. Canada (Fed CA, 2023) the Federal Court of Appeal considered a second appeal (first was from the Tax Court) of the tax categorization status of 'non-completion fees' that the taxpayer received on the failure of it's auction bids to purchase shares of another corporation.
In these quotes the court considers the distinction between income categorized under s.9(1) ITA ['basic rules'] and capital gains:E. Issue 1 – Did the Tax Court err in concluding that the Fees were business income pursuant to s. 9(1)?
[23] The Tax Court applied the Supreme Court’s decision in Ikea Ltd. v. Canada, 1998 CanLII 848 (SCC), [1998] 1 S.C.R. 196, 155 D.L.R. (4th) 295 [Ikea]. As I explain below, the principles from Ikea were misinterpreted by the Tax Court and this resulted in an extricable error of law.
[24] Ikea, the well-known furniture retailer, received a tenant inducement payment (TIP) from the West Edmonton Mall in connection with entering into a long-term lease. The issue was whether the TIP was received on income or capital account. The Supreme Court noted that s. 12(1)(x) of the Act could not apply because the provision was not in force at the relevant time (Ikea at para. 20).
[25] In the Supreme Court, Iacobucci J. concluded that the TIP was received on income account based on the factual finding that the TIP was made to reimburse rent or other obligations on revenue account. The Court stated that since “the TIP was made to reimburse an expense on income account [it] was clearly itself income” (Ikea at para. 29).
[26] The conclusion was summarized at paragraph 33 of Ikea. This is reproduced below, with emphasis on the passage that was relied on by the Tax Court.[33] In my view, Bowman J. was entirely correct in finding that the TIP received by Ikea was on revenue account and should have been included in income for tax purposes. The payment was clearly received as part of ordinary business operations and was, in fact, inextricably linked to such operations. On the evidence, no question of linkage to a capital purpose can seriously be entertained. Had Ikea wished, it could have requested that the TIP be advanced expressly for the specific purpose of fixturing, or to defray some other capital cost. It did not do so, however, and the payment was in fact made free of any conditions for or stipulations as to its use. Therefore, whether the TIP represented a reduction in rent or a payment in consideration of Ikea’s assumption of its various obligations under the lease, it clearly cannot be treated as a capital receipt and should have been included in Ikea’s income ....
[Emphasis added] ....
[28] The Court’s interpretation of Ikea, and its application to the facts, essentially ignores the distinction between capital and revenue receipts. This was the very issue in Ikea.
[29] When Ikea is read as a whole, it is evident that Iacobucci J.’s reference to ordinary business operations in paragraph 33 is referring to something on revenue account. The very next sentence in Ikea states that there is no link to a capital purpose.
[30] The necessary linkage to something on revenue account is also made clear at paragraph 30 of Ikea:
[30] As for the second contention, Ikea argued that if the payment were to be characterized as consideration for its continued obligation to carry on business in the premises during the term of the lease, it should be considered a capital receipt because such a payment goes to the “structure of the business”. With respect, however, I believe this submission misses the mark. An accurate characterization of the receipt requires an assessment of the nature of the specific obligations in question. In this case, as Bowman J. correctly found, Ikea’s obligations under the lease essentially consisted of the payment of rent and the operation of its business in the leased premises. These were clearly expenses incurred in the day‑to‑day operation of the business and were therefore on revenue account.
....
[34] In this Court, the Crown submitted that the application of Ikea in this case is supported by the decision of this Court in Morguard Corporation v. Canada, 2012 FCA 306 [Morguard]. In Morguard, this Court upheld a decision of the Tax Court which applied Ikea to a break fee received as part of a failed takeover bid.
[35] However, the facts in Morguard are materially different from the facts in this case. For example, in Morguard the Tax Court determined that Morguard Corporation was in the business of acquiring companies. In this case, the Tax Court found that Falconbridge was not in the business of acquiring or selling companies (TC Reasons at para. 73). It is not surprising that the Tax Court did not rely on Morguard.
[36] The Crown urged us to apply Morguard despite this difference. Essentially, it seeks to extend Morguard beyond its particular facts. In my view, an extension to the facts of this case is not warranted because it would erode the well-entrenched principles as to the distinction between items on capital and revenue account. I am not aware of any facts in this case which would provide a sufficient link between the Fees and something on revenue account. I conclude that the Fees were received on capital account because the linkage was to a proposed acquisition of a capital asset.
....
[39] A capital gain is generally a gain from the disposition of property, unless the gain is otherwise included in computing income. The capital gain is calculated as the compensation received for the disposition, less the cost of the property disposed of and expenses incurred in the disposition.
[40] Whether the Non-Completion Fee gave rise to a capital gain depends in large part on the bid terms set out in the Arrangement Agreement. It required that Falconbridge and Diamond Fields each facilitate the completion of the merger. This required approvals from the shareholders of both companies. The Arrangement Agreement also provided that nothing in that agreement restricted Diamond Fields’ board of directors from supporting or facilitating a competing bid in fulfilment of its fiduciary duties.
[41] The Arrangement Agreement also set out the different circumstances in which the Non-Completion Fee would be payable. In all cases, the Non-Completion Fee was not payable unless a competing offer was made and completed. The circumstances which triggered Diamond Fields’ obligation to pay the Non-Completion Fee were: (1) a competing offer was made before August 31, 1996; (2) the Arrangement Agreement was terminated in accordance with its terms when Falconbridge dropped out of the bidding; and (3) the transaction contemplated by the competing offer was completed.
[42] To qualify as a capital gain, the Non-Completion Fee must be received as compensation for the disposition of property. ... . Wall v. Canada
In Wall v. Canada (Fed CA, 2021) the Federal Court of Appeal considered when proceeds from the building and sale of a series of houses were to be taxed on an income or a capital gains basis:[24] Therefore, the critical issue in this appeal is whether Mr. Wall was engaged in a business or an adventure or concern in the nature of trade when he had the three houses constructed. Neither party disputed that the tests to be considered in determining whether a gain realized on a disposition of property is an income gain or a capital gain are as set out in Happy Valley Farms Limited v. Minister of National Revenue, [1986] 2 C.T.C. 259, 86 D.T.C. 6421 (F.C.T.D.):• the nature of the property sold;
• the length of the period of ownership;
• the frequency or number of similar transactions;
• work expended on or in connection with the property;
• the circumstances that were responsible for the sale of the property;
• motive. [25] The tests are all based on the facts of the particular case and directly or indirectly lead back to the intention of the taxpayer. The significance of the taxpayer’s motive or intention was noted by the Supreme Court of Canada in Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103, 127 D.L.R. (4th) 193:16 The first requirement for an adventure in the nature of trade is that it involve a "scheme for profit-making". The taxpayer must have a legitimate intention of gaining a profit from the transaction. Other requirements are conveniently summarized in Interpretation Bulletin IT-459 "Adventure or Concern in the Nature of Trade" (September 8, 1980) which references Interpretation Bulletin IT-218 "Profit from the Sale of Real Estate" (May 26, 1975) for a summary of the relevant factors when the property involved is real estate.
17 IT-218R, which replaced IT-218 in 1986, lists a number of factors which have been used by the courts to determine whether a transaction involving real estate is an adventure in the nature of trade creating business income or a capital transaction involving the sale of an investment. Particular attention is paid to:
(i) The taxpayer's intention with respect to the real estate at the time of purchase and the feasibility of that intention and the extent to which it was carried out. An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade.
(ii) The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer's business or occupation is related to real estate transactions, the more likely it is that the income will be considered business income rather than capital gain.
(iii) The nature of the property and the use made of it by the taxpayer.
(iv) The extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the taxpayer. Transactions involving borrowed money and rapid resale are more likely to be adventures in the nature of trade. [26] In Cardella v. Her Majesty the Queen, 2001 FCA 39 (FCA), this Court stated that a taxpayer’s intention is “a factor of utmost importance”:[26] The courts have consistently emphasized that, in determining whether a transaction was intended as an adventure in the nature of a trade, regard must be had to the surrounding circumstances: Happy Valley Farms Ltd. v. The Queen, 86 DTC 6421 (F.C.T.D.), at 6424. The taxpayer's intention as a factor of utmost importance was stressed by the Supreme Court of Canada in Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103.
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