| 5-922234 | |
| 24(1) | P. Lee |
| (613) 957-8977 |
Attention: 19(1)
October 30, 1992
Dear Sirs:
Re: Purchase and Sale of Canadian Resource Property
This is in reply to your letter of July 23, 1992, which requested a technical interpretation regarding the tax implications of a transaction whereby contingent liabilities with respect to future removal and site restoration costs are transferred to and assumed by an arm's length purchaser as part of a purchase and sale of oil & gas properties.
In this regard, we can provide the following general comments which may be of assistance to you. Our comments, however, should not be construed as confirming the income tax effects of any particular situation or arrangement.
Comments
By virtue of subparagragh 54(h)(i) or 13(21)(d)(i) and in conjunction with paragragh 66.4(5)(c) of the Act, "proceeds of disposition" of property includes the sale price of property that has been sold.
24(1)
Generally, where a purchaser assumes liabilities of a vendor in consideration or part consideration for the acquisition of assets, that amount represents the cost or part of the cost to the purchaser of the assets. See, by analogy, Farmers Mutual Petroleums Ltd., 67 DTC 5277 (SCC), where the taxpayer agreed to pay all costs incurred by Scurry-Rainbow Oil Limited in the performance of Scurry's obligations with respect to a seismic program in exchange for the acquisition of an interest in oil and gas properties.
However, an amount contingently payable for an asset does not form part of the cost of the asset until the contingency has been met: see J.L. Guay Ltee, 71 DTC (FCTD), 73 DTC (FCA), 75 DTC 5094 (SCC); Newfoundland Light and Power Co. Ltd., 90 DTC 6166 (FCA); Mandel, 76 DTC 6316 (FCTD), 78 DTC 6518 (FCA), 80 DTC 6148 (SCC); and Lipper, 79 DTC 5246 (FCTD).
In our opinion, the sale/purchase price of the assets is the amount that the vendor and purchaser have agreed to which, in this case, is $24(1). Based on the jurisprudence noted herein, the sale/purchase price would not be adjusted for the contingent liabilities assumed by the purchaser. We note that this opinion is in accord with your views on the matter.
Accordingly, the cost of the assets to the purchaser is $24(1) and the proceeds of disposition of the assets to the vendor is $24(1). It is a question of fact and valuation as to how the sale/purchase price should be allocated among each of the assets for purposes of subparagragh 66.4(5)(b)(i) or (v) and subparagragh 13(21)(f)(i) or (iv) of the Act by the purchaser and vendor. If the allocation is unreasonable, the Minister may make a determination and adjust the allocation pursuant to section 68 of the Act. See, by analogy, Golden, 86 DTC 6138 (SCC).
The above comments are merely the expressions of opinion of those Revenue Canada officials named herein and as such should not be construed as advance income tax rulings, nor are they binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion. We refer you in this respect to paragraghs 21 and 22 of Information Circular 70-6R2.
Yours truly,
Section ChiefResource Industries SectionManufacturing Industries, Partnerships and Trusts DivisionRulings Directorate
Issue Sheet
24(1)