SCC grants leave to appeal in Daishowa

On June 4, 2012, following a rare oral hearing, the Supreme Court of Canada (SCC) granted the taxpayer leave to appeal in Daishowa-Marubeni International Ltd. v. The Queen, 2011 FCA 267.

The case deals with the question of whether a contingent liability assumed by a purchaser as part of the purchase price may give rise to additional proceeds of disposition.

In this case, the taxpayer sold two sawmill operations. Included with the operations were associated timber licences which gave rise to certain reforestation liabilities. In reporting its income in respect of the sales, the taxpayer did not include any amounts pertaining to the disposition of the reforestation liabilities. The Minister of National Revenue reassessed the taxpayer to adjust the proceeds of disposition for the sawmill operations to include an amount that was said to estimate the value of the reforestation liabilities.

Writing for the majority of the Federal Court of Appeal (FCA), Justice Nadon agreed with the Minister. The majority concluded that the taxpayer and the purchasers had agreed to a value for the reforestation liability which amount was subtracted from the gross sales prices. That being the case, the taxpayer received consideration in that amount for the reforestation liability which should be reported as proceeds of disposition.

In a strong dissenting decision, Justice Mainville concluded that the taxpayer was not liable for tax in respect of the transfer of the reforestation liabilities because the reforestation liabilities and the timber rights were inextricably linked such that the reforestation liabilities were taken into account when determining the (lower) fair market value of the sawmill operations.

Leave to appeal was granted by the SCC on two specified issues:

1. Should the reforestation liabilities inherited by the purchaser be included in the proceeds of disposition?

2. Does it matter that the parties agreed to the future amount of the restoration liability?

A hearing date has not yet been set.