Adjusted Cost Base

The taxpayer purchased 40 acres of vacant land in 1992 for $110,000, and allegedly incurred interest carrying charges of $179,000 up until its sale in 2006 for $370,000. Lyons J stated (at para. 45):

In Stirling, the Federal Court of Appeal held that interest on money borrowed to acquire property for the purpose of making a capital gain, rather than an income-earning purpose, is precluded, on disposition, from forming part of the cost of the property and cannot be added to the acb.

The estate of a deceased German resident sold three rental properties in BC. The estate added probate and legal fees that were paid in establishing the title of the estate to the properties to the adjusted cost base of the rental properties. The Minister denied the increase in adjusted cost base, and thereby reduced the estate's capital loss (which was deemed to be a capital loss of the deceased under s. 164(6).)

Webb J. found that as the fees were necessary in order for the estate to acquire a registrable interest in the properties, they were part of its acquisition cost. In the alternative, he noted that the fees could be characterized as outlays or expenses the estate incurred for the purpose of making a disposition of the rental properties, which would reduce the estate's proceeds of disposition under s. 40(1)(a), leading to the same capital loss that the deceased claimed.

A fee that the taxpayer paid in connection with acquiring rights of an individual to purchase a condominium, with the taxpayer then acquiring the condominium, were part of the cost of acquiring the condominium.

The taxpayer agreed to transfer its Toronto property to the City of Toronto with the compensation to be determined (under section 31 of the Expropriations Act) by the Ontario Municipal Board. It later was agreed that Toronto would pay compensation to the taxpayer of $2.9 million for the land, $0.1 million for the building and $9 million in respect of damages occasioned as a result of the inability of the taxpayer to relocate its business. The taxpayer treated the $9 million as a non-taxable capital receipt.

After noting that the character of the damages payment to the taxpayer turned on the actual circumstances of the payor (the City), Bell T.C.J. indicated that the total of $9 million of damages paid by the City would be added to the cost of the real property to it.

It was found that the taxpayer had acquired shares of a U.S. corporation ("GGM") on the basis of an undertaking that it would make payments to executives of a subsidiary of GGM when they became entitled to receive such payments under the terms of a profit sharing plan notwithstanding that this undertaking was not documented in the rollover agreement. Archambault T.C.J. found, on this basis, that the payment actually made by the taxpayer to such executives at the time it sold its shares of GGM to an arm's length purchaser were part of its cost of the GGM shares, with the result that it was entitled to deduct, in computing its capital gain on the disposition, the amount of such payments.

The taxpayer received a 99.99% limited partnership interest on a rollover basis and then received the resource properties of the partnership in question when the partnership subsequently dissolved following the acquisition by the taxpayer of the remaining 0.01% general partnership interest. The Court found that the cost to the taxpayer of the resource properties was equal to the fair market value of the limited partnership interest prior to the dissolution of the partnership rather than its nominal cost.

The following is a somewhat simplified description of transactions that would have occurred but for the withdrawal by Inland Revenue of an advance clearance:

1. Investors purchased a leasehold interest in a property in a designated enterprise zone for 198 years from receiver-managers for the sum of £95 million, of which £64.125 million was borrowed on a 10-year full recourse and interest-bearing basis from a bank ("Hill Samuel"); the receiver-managers used £75.125 million of the amount received to pay a "reverse premium" to a subsidiary ("SQPL") of the promoter of the scheme ("Matrix") as the consideration for the previous agreement of SQPL to sublease the property for 99 years at a rent that, for the first 10 years of the sublease, was at an above-market rate; after payment of fees to Matrix and the funding of future construction costs, the receiver-managers retained £8 million of the £95 million received by them;
2. SQPL lent £64.125 million to a subsidiary of Hill Samuel which, in turn, lent that sum to Hill Samuel; the balance of £8 million received by SQPL was used to pay a fee to Hill Samuel in respect of its guarantee of SQPL's obligations under the 99-year sublease, and to make a deposit with the subsidiary of Hill Samuel;
3. rent for the initial 10 years under the 99-year sublease by SQPL was used to fund the interest payments owing by the investors on their loan from Hill Samuel; and
4. an "exit arrangement" effectively permitted the investors after 10 years to cause the arrangement to be unwound at that time.

In finding that the scheme, if implemented, would not have entitled the investors to claim capital allowances on the full £95 million supposedly paid by them, Lord Templeman stated (p. 94)):

"The sum of £64.125m required to make up the fiscal price will never be paid by Hill Samuel and its subsidiary, by the trustee, the receiver and SQPL in such a manner that each receipt is matched by an equal and pre-ordained immediate payment. The circular payments are self-cancelling."

Following the acquisition by the taxpayer of a mortgage owing by a corporation in financial difficulties, the taxpayer resorted to power of sale proceedings against the corporation but the shareholders of the corporation instituted proceedings in an attempt to obtain a permanent injunction prohibiting the sale of the secured property. U.S. $150,000 paid by the taxpayer to the other shareholders to discontinue those proceedings was found to have been paid as "an integral part of acquiring the mortgage and being able to use it to force a sale" (p. 1763) and, accordingly, formed part of the cost to the taxpayer of the mortgage.

A limited partnership (the "Victory Partnership") of which the taxpayer was a member acquired from a Californian film company ("LPI") rights to a film which was in production. The Victory Partnership paid $3,250,000 toward the cost of the film and LPI agreed to lend to the Victory Partnership the funds required to complete the film. In finding that this supposed loan (which was repayable by the Victory Partnership only out of a share of receipts from the film) was not in fact a loan (with the result that the cost of the film to the Victory Partnership was found to be only $3,250,000 rather than the total cost of making the film of $14 million), Lord Goff stated (p. 129)):

1. LPI continued to make the film as before, with all matters relating to the film (including cost) remaining under its control, and bearing the burden of any financial over-run beyond the approved budget of $13,300,000.
2. The bank account into which money was to be paid by LPI was to be opened at a bank nominated by LPI, and no money was to be drawn from the account without the consent of LPI.
3. When money was paid into the bank account by LPI, an identical sum was repayable by Victory Partnership to LPI out of the same bank account on the same day, leaving no balance outstanding at the end of the day's trading.
4. By a non-recourse agreement, neither Victory Partnership nor any partner in Victory Partnership was personally liable for the repayment of the so-called loan.
5. The so-called loan was repayable to LPI by payments out of the net profits of the film under arrangements which were inconsistent with the concept of a commercial loan.

Costs relating to the entertainment and telephoning of stock brokers were costs of acquiring or disposing of the taxpayer's securities.

Where a taxpayer company satisfies, in accordance with a share purchase agreement, its obligation to pay for the shares it has acquired of a second company by allotting its shares to that second company, the cost base of the acquired shares is not the value or market value of the allotted shares but, in the case of an honest and straightforward transaction, the price upon which the parties have agreed.

The forgiveness of trade indebtedness owing by the taxpayer reduced the cost of inventory on hand at that time which it had acquired in the previous taxation year.

A resident of the United Kingdom (Mrs. Bentley) in 1967 inherited an interest in German property having a value of DM 132,780, and in 1973 sold the property for DM 152,241. In the interim, the pound was devalued. Her capital gain was to be calculated by applying the 1967 exchange rate to the acquisition value and the 1973 exchange rate to the proceeds, rather than by applying the 1973 exchange rate to the amount of the gain in terms of deutsche marks. "The market value of the acquisition thus deemed to have taken place at her father's death ... can only be expressed for the purposes of the computation required to be made under the capital gains legislation in sterling, which is the only permissible unit of account."

A private investment dealing company, whose securities had declined substantially in value, transferred the more speculative of those securities to the taxpayer for a purchase price stated to be equal to their original cost and which was satisfied by the assumption of a debenture by the taxpayer and the issuance of shares. In rejecting the contention of Revenue that the cost of the securities to the taxpayer should be based on their fair market value at the time of acquisition rather than on the amount of the debenture and the par value at which the shares were issued, Lord Wright stated (pp. 289-290)):

"... The transaction was one for other than a money consideration, and the parties were free to make their own bargain. No authority were cited for the claim of the Revenue in a case like this to go behind the agreed consideration and substitute a different figure. ... If the Revenue are to have a power to exercise a general supervisory jurisdiction under Schedule D on the reasonableness of contracts or transactions, they must be invested with that power by legislation." [C.R: 9 - Computation of Profit]