A Canadian Acquisitionco acquired Canadian Targetco for a cash base price plus earnout obligations, and then immediately merged with Targetco under a short-form amalgamation. The Rulings Directorate rejected Amalco’s treatment of its earnout payments as eligible capital expenditures, stating:
[R]egardless of whether the [Targetco] Shares existed at the time that the Earnout Payments became payable or paid, the Earnout Payments nevertheless are part of the cost of the Shares. Mandel…appears to dictate such a result….
The Directorate went on to find that, in any event, the earnout payments were not made for the purpose of gaining or producing income from a business, stating:
Amalco has to be placed in the shoes of Acquisitionco at the time of Acquisitionco entering into the Agreement. At that time, the purpose for the Earnout Payments was not to earn income from a business but to acquire a capital asset, i.e., the Shares.
In the alternative, a position can be taken that the Earnout Payments were not incurred for the purpose of earning income from a business because Amalco became liable for and incurred the Earnout Payments as a consequence of the mechanisms of an amalgamation as set out in the BCA and the Act.