Question
30. What are Revenue Canada's views regarding:
(a) failure of parties to allocate a sale price among various assets,
(b) use of differing allocations by the parties where the agreement was silent on allocation, and
(c) the 1988 Tax Court decisions in Baur and Peterson regarding allocation?
Response
30. (a)&(b) In a situation where there is a sale that involves various assets and the parties to the sale have agreed upon a global price for all the assets, but do not allocate amounts to each individual asset, several scenarios are possible.
In the event that the parties make identical allocations of the sale/purchase price to the various assets involved and the allocations are reasonable, the Department will accept the allocations of the parties.
Where the purchaser and seller in a transaction allocate the price of purchase/sale differently for tax purposes, the Department would then evaluate each party's allocation to determine if either one was reasonable. It is the facts and circumstances that will determine the reasonableness of an allocation. One of the essential circumstances to be considered is the relationship of the parties and how each of them arrived at their own apportionment. Where it is determined that neither allocation is reasonable, the Department will allocate the purchase/sale price on a reasonable basis between the assets involved, as is permitted under section 68 of the Income Tax Act.
(c) The courts in resolving any matter regarding the allocation of the purchase price to the various assets sold, must decide what is reasonable within the parameters of section 68 of the Income Tax Act. The decisions issued in H. Baur Investments Limited v M.N.R. 88 DTC 1024 and R.L.Petersen v. M.N.R. 88 DTC 1040, the courts in considering the application of the predecessor to the present section 68 of the Income Tax Act, placed considerable emphasis on the Supreme Court decision in Her Majesty The Queen v. George Golden et al. 86 DTC 6138. In this case, the highest court of the land considered the relationship that existed between the parties and the method. they used in arriving at the apportionment of the purchase/sale price. Therefore there does not exist any one method of determining the reasonableness of an allocation, but each such case must be decided on the basis of its own facts and merits.
Canadian Tax Foundation - B.C. ConferenceSeptember 1991Franklyn S. GillmanSection 22