Tax Insights: Supreme Court of Canada ruling in Daishowa-Marubeni — Tax treatment of reforestation obligations on sale of forestry assets

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In brief: Daishowa-Marubeni International Ltd. v. The Queen (DMI)

Congratulations to John Saunders, a partner in Wilson and Partners LLP, a law firm affiliated with PricewaterhouseCoopers LLP. John successfully argued Daishowa-Marubeni International Ltd. v. The Queen (DMI) in the Supreme Court of Canada (SCC). The SCC released its unanimous decision on May 23, 2013.

The decision held that no amount was includible in DMI’s sale proceeds for forest tenures (i.e. the right to harvest timber on land) as a result of two purchasers having assumed DMI’s future obligations to reforest the land on which it had previously harvested trees. This is an important and positive decision for the forestry, mining, pipeline and petroleum industries, where it is common that a purchaser of forestry or oil producing assets must assume reforestation or reclamation obligations. The SCC held that the future costs were ‘embedded’ in the transferred assets, were not distinct existing liabilities and thus were not includible in the sale proceeds.


Daishowa-Marubeni International Ltd. (DMI): Supreme Court of Canada Decision

Daishowa-Marubeni International Ltd. (DMI): Supreme Court of Canada Decision

Watch our webcast to learn about the implications of the DMI Supreme Court decision for the mining, forest, paper and packaging, and oil and gas industries.

Where a ‘hard’ liability of a seller (e.g. a mortgage debt or accounts payable) is assumed by a buyer on an asset sale, it is clear that the seller must include the amount of the assumed liability in its sale proceeds for tax purposes.

Whether this is also the case where the assumed seller ‘liability’ is a contingent or future obligation had not previously been addressed by the SCC.

The established Canada Revenue Agency (CRA) position has been that the seller must include the fair market ‘value’ of an assumed contingent liability in the sale proceeds, while at the same time taking the position that the buyer would not be able to include this amount in its cost for the purchased assets until the amount of the liability became completely certain.

In the DMI case, the CRA took the position that on the sale of two of its timber mills, DMI must treat as part of its sale proceeds the accounting reserve for estimated future reforestation obligations that was required under accounting principles to be recorded on its balance sheet. DMI challenged this position.