Supreme Court of Canada declines to hear an appeal on whether an expenditure in the course of a corporate reorganization was on capital or income account


Earlier today, the Supreme Court of Canada (The Chief Justice, Justice Rothstein and Justice Moldaver) dismissed an application for leave to appeal by Imperial Tobacco dealing with the classic distinction between deductible corporate expenditures on income account and non-deductible corporate expenditures on capital account.

In brief, the taxpayer made a payment to extinguish an employee stock option plan (suggesting that the payment was made on income account) but made the payment during the course of a corporate reorganization (suggesting that the payment was made on capital account).

The taxpayer’s argument for deductibility was supported by the Tax Court decision in Shoppers Drug Mart Limited v. The Queen (dealing with the very same transaction) while the Crown’s argument for non-deductibility was supported by the earlier Federal Court of Appeal decision in Kaiser Petroleum Ltd. v. The Queen.

Both the Tax Court of Canada and Federal Court of Appeal followed the reasoning of the Federal Court of Appeal in Kaiser and sided with the Crown, holding that the payment was on capital account. The decision of the Federal Court of Appeal is now final and binding.

For a brief description of the reasoning of the Federal Court of Appeal, see our earlier blog post.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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