Implication of Daishowa to Purchasers

Written By Greg M. Johnson and Wade Ritchie

Since the decision of the Supreme Court of Canada in Daishowa‑Marubeni International Ltd. v. Canada, 2013 SCC 29 [Daishowa], clarity exists for how a vendor treats abandonment obligations on the sale of resource properties—namely, the amount of the abandonment obligations do not form additional consideration but are simply factored into the purchase price for such properties. Daishowa did not address how the purchaser should characterize the costs incurred in meeting these assumed abandonment obligations.

In a recent article available to subscribers at Thomson Reuters, The Cost of Acquiring an Asset With Environmental Liabilities Post - Daishowa, we address this issue. The Canadian Revenue Agency (CRA) had historically taken the view that a purchaser should include the amounts paid for abandonment obligations as an additional cost of the property which would typically be additional COGPE (or Canadian oil and gas property expense). The CRA refused to update this position at the 2017 Canadian Petroleum Tax Society Conference, however, this view is inconsistent with Daishowa where the Court held that the proceeds of disposition for a resource property is the amount received (which would include consideration of, and be reduced by, any abandonment obligations). In our view, the purchaser should not include amounts paid for assumed abandonment obligations as an additional cost of the resource property, and should apply general tax principles to characterize these costs. The applicable test will be whether such amounts are on income or capital account. In the article we conclude that the payment of such abandonment costs should generally be on income account and be deductible in computing income.

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