Rio Tinto Alcan v. The Queen: Welcome Expansion Of The Canadian Tax Deductibility Of M&A Transaction Expenses

Executive Summary

In a welcome decision for Canadian acquirors and targets, the Tax Court of Canada recognized, in Rio Tinto Alcan Inc. v The Queen,1 that certain oversight expenses—including certain investment banking and other professional advisory fees—should be deductible in the context of M&A transactions. This is particularly so where such services are provided to enable the board of directors of the acquiror or target to determine whether to proceed with the transaction. The Court also established a principled basis for the deductibility of transaction expenses in a far broader set of circumstances than those previously accepted by the Canada Revenue Agency (the CRA), in particular, in situations in which a board is discharging its oversight function prior to a decision to implement a particular transaction(s). The decision is under appeal; if affirmed, it will represent a significant expansion of the deductibility of transaction fees. The onus will remain on the taxpayer to prove the expenses are deductible based on the new criteria; engagement letters for advisors and their invoices, clearly demarcating oversight activities in respect of proposed transaction(s) from the implementation phases, should be prepared accordingly.

Background

At issue in Rio Tinto was the deductibility to Alcan (the Canadian predecessor to Rio Tinto Alcan) of approximately $100 million in transaction expenses, including legal, investment banking, financial, and other professional advisory fees, incurred in the course of two related transactions—a public corporate acquisition of a French aluminum company and a related spin-off of certain assets as mandated by competition authorities as a condition of the public takeover. Consistent with the CRA's historical position, the government (referred to as the Crown) argued that the expenses were not deductible on a current basis on the grounds that such expenses were incurred in the context of a capital transaction.2 Subject to certain statutory exceptions, capital expenses have limited immediate use to corporate taxpayers under Canadian tax law.3 In allowing a large proportion of the expenses to be deducted on a current basis, the Court rejected the CRA's position, recognizing the importance of the board of directors' oversight function on a corporation's income-earning process.

Importance of the Board's Oversight Function

Significant to the ultimate result of the case, the Court recognized the importance of the...