In connection with a privatization transaction and at a time that it was still owned by the federal Crown, the taxpayer purchased assets for a stipulated purchase price that was less than the price at which an arm's length purchaser had committed (pursuant to the same agreement under which the asset sale occurred) to purchase the common shares of the taxpayer. Such purchase price excess was reported for income tax purposes by the taxpayer as the cost of cumulative eligible capital (i.e., goodwill).
After referring to Stanton v. Drayton (regarding shares acquired in consideration for the issuance of treasury shares) as finding that “since the transaction was at arm's length and otherwise unimpeachable, the cost of the shares was the consideration agreed between the parties and not the par value, or market value of the shares” (para. 22), Pelletier JA indicated (at para. 31) that:
Absent factors which would make the transaction impeachable, the agreement of the parties determines the cost to the corporation of issuing shares in exchange for property.
and (at para. 32) that
The cost to the Appellant of issuing shares as part consideration for the assets ... is the amount agreed between the parties, as evidenced by the stated capital of the common shares in the Appellant.