Subsection 143.4(1) - Definitions
Right to reduce
Administrative Policy
Chris Falk, Stefanie Morand and Brian O'Neill, "Is there Always Certainty Regarding Tax Basis? – Limitations on Expenditures Pursuant to Sections 143.3 and 143.4," draft version of paper for CTF 2014 Conference Report.
Does automatic adjustment entail "exercise"? (p. 17)
The first part of the definition captures Collins-like scenarios. What is intended to be captured by the second part of the definition is less clear. Query, for example, whether the definition captures adjustments that occur automatically under a contract (e.g., a price adjustment clause) or is limited in scope to scenarios in which the reduction occurs at the discretion of the taxpayer. While the authors understand, based on informal discussions with the Department of Finance, that automatic adjustments are intended to be captured, the use of the adjective "exercisable", together with the phrase "an amount to the extent that the taxpayer [...] has a right to reduce the amount", provides support for the conclusion that an dement of discretion on the part of the taxpayer is required….
Limitation of contingent amount to potential reduction (p. 17)
Yet another interpretive question is the amount of the "contingent amount" where, for example, a taxpayer incurs an expenditure of $100 and has a right to reduce the expenditure by $20. While the use of the phrase "reduce or eliminate" in the definition of "right to reduce" may give rise to some ambiguity, a contextual and purposive reading of the section strongly supports the conclusion that the contingent amount would be limited to $20.
Potential inclusion of price adjustments or indemnities (p. 17)
Finally, it is unclear whether contingent amounts for purposes of section 143.4 are limited to unpaid amounts or whether the term encompasses refund or reimbursement rights (e.g., rights to payments under indemnity provisions or pursuant to price adjustment clauses)….
Subsection 143.4(2) - Limitation of amount of expenditure
Administrative Policy
6 March 2015 Folio S3-F6-C1
General paraphrase.
10 October 2014 APFF Roundtable Q. 15, 2014-0538151C6 F
A newly formed corporation ("Newco") purchases the shares of a target corporation ("Target") for consideration that includes an earn-out clause (resulting in a debt which is subsequently forgiven). Newco and Target amalgamate, so that the shares of Target are cancelled. Would a reduction in the cost of the shares of Target (through the application of subsection 143.4(2) of the ITA) prior to the subsequent amalgamation of Target with Newco cause the debt to qualify as an "excluded obligation" (as defined in subsection 80(1) of the ITA), so that the settlement of the debt following the amalgamation should not result in a "forgiven amount" (as defined in subsection 80(1) of the ITA)? CRA responded (TaxInterpretations translation):
[Y]ou have assumed the Newco would, at the moment of the acquisition, have a real legal obligation to pay the maximum purchase price, so that ITA subsection 143.4(2) would be applicable at the moment of the acquisition of the shares for an unpaid purchase price, and that the purchase price would be extinguished after the amalgamation. It is not possible to provide definitive responses without knowing all the facts of a specific case. However we can offer the following general comments which nonetheless, in some circumstances, would not apply in a particular situation. …
…(a)…[A] reduction in the cost of the shares of the Target by the application of ITA subsection 143.4(2) prior to the amalgamation would in general permit the debt to qualify as an "excluded obligation" as per the definition provided in ITA subsection 80(1) by reason of the application of paragraph (a) of that definition.
Paragraph (d) of the definition of "excluded obligation in general could not apply because the debt was of a capital nature.
Articles
Chris Falk, Stefanie Morand, Brian O'Neill, "Is there Always Certainty Regarding Tax Basis? – Limitations on Expenditures Pursuant to Sections 143.3 and 143.4", draft version of paper for CTF 2014 Conference Report.
No grind if up-front payment (p. 19)
Assume, for example that:
- Taxpayer A purchases capital property from Taxpayer B in exchange for $100, and
- Taxpayer A has a right to recover $20 from Taxpayer B in the event certain conditions are met and it is reasonable to conclude that that right will become exercisable.
Unless subsections 143.4(2) and (3) are read iteratively, it would seem that Taxpayer A's cost of the property in this example is $100 even if the recovery right is considered to be a contingent amount for purposes of the section. Accordingly, given that the relief afforded in subsection 143.4(3) may not be of assistance if a property is no longer owned at the time of payment, planners may wish to give consideration to having amounts paid up-front…
Subsection 143.4(4) - Subsequent years
Articles
Chris Falk, Stefanie Morand, Brian O'Neill, "Is there Always Certainty Regarding Tax Basis? – Limitations on Expenditures Pursuant to Sections 143.3 and 143.4", draft version of paper for CTF 2014 Conference Report.
Harshness of s. 12(1)(x) inclusion (pp. 19-20)
[T]he consequences of the paragraph 12(l)(x) regime may seem especially harsh and problematic if the expenditure is a capital expenditure (e.g., where the cost of capital property is affected). In some circumstances, it may be possible to elect under subsection 13(7.4) or 53(2.1) to reduce the cost of the property in place of the paragraph 12(1)(x) income inclusion.
No relief where amount paid (p.20)
Further, there is no rule that parallels the relieving rule in subsection 143.4(3). This means that to the extent subsection 143.4(4) applies but the subsequent contingent amount is ultimately paid (or, assuming section 143.4 is considered to extend to amounts that have been paid and an amount is paid up-front, the right to reduce ceases to exist without any amount being recovered by the taxpayer), it will be necessary to establish recognition for the payment elsewhere in the Act. The provisions that typically apply in the context of a paragraph 12(1)(x) amount (e.g., subsection 39(13) and paragraph 20(1)(hh) may not be of assistance….