The taxpayer, a Canadian public company listed on the TSX and NYSE and in Europe, incurred fees (mostly of investment dealers, law firms and a French lobbying and public relations firm (“Publicis”)) in connection with its decision to make a hostile bid for a French public company (“Pechiney”) and the subsequent making and completion of that bid late in 2003. In 2004, the taxpayer determined to effect a butterfly spin-off of a portion of its (laminated products) assets, which resulted in the receipt by its shareholders of shares of a new public company (“Novelis”) in January 2005.
Before turning to s. 20(1)(bb), Hogan J found that 35% of the $8.2 million fee paid to Lazard Frères related to work leading to advice to the taxpayers’ board of directors respecting whether, and on what terms, an offer should be made for the Pechiney shares and, therefore, was fully deductible under s. 9, whereas the balance relating to the negotiation and revision of the offer, was a capital expenditure (which CRA accepted was part of the cost of the Pechiney shares). The same approach indicated that 65% of the $26 million fee paid to Morgan Stanley (including respecting a fairness opinion) was fully deductible, as well as indicating that fees of Lazard Frères respecting the divestiture options incurred up to the time of board approval of the butterfly spin-off were fully deductible, and thereafter incurred on capital account.
In finding that the portion of the fees paid to Morgan Stanley and Lazard Frères respecting the Pechiney transaction, that related to the work leading up to advsing the board on wether and on what terms to launch the bid, was also deductible under s. 20(1)(bb), Hogan J first found that the fees were not “commissions,” as they were fixed and not established as a function of a percentage of sales (para. 146) and, furthermore, the two dealers were not acting as agents (para. 152). In also rejecting a Crown argument that advice on a bid for all the shares of Pechiney did not qualify as advice on the purchase of "specific" shares (referred to more broadly in the French version as "some" shares), Hogan J stated (at para. 159):
...Parliament used the expressions “specific shares” and “certaines actions” to exclude generic investment advice such as a recommendation that 10% of an investor’s savings be invested in preferred shares. In summary ... a deduction would be available where the investment advice is clear and concerns shares of a particular issuer.
Similarly, respecting the divestiture-related fees of Lazard Frères incurred up to board approval of a butterfly spin-off, these related to advice and approaches to potential third-party purchasers of the shares through which the laminated products business was held as well as to the ultimate sale (on a rollover basis) of the shares of that laminated products company to Novelis in consideration for the acquisition of (subsequently redeemed) preferred shares of Novelis, and the calculation of the Lazard Frères success fee did not represent a percentage of the value of those shares – so that those fees also were deductible under s. 20(1)(bb) as well as under s. 9.