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Overview
In Cineplex Inc. v The King,1 the Tax Court of Canada confirmed that a payment made to cease business operations was a deductible business expense under subsection 9(1) of the Income Tax Act (Canada) (the "Act").2 The Tax Court also addressed the question of whether proceeds of disposition ("POD") can have a negative value. The Tax Court ruled that POD is an inherently positive concept, with Parliament likely not intending for it to be a negative.
Background
Between 1993 and 2013, the American theatre chain AMC operated 8 movie theatres in Canada through a subsidiary named Ventures. The operations were financially unsuccessful and in 2004, AMC decided to end its Canadian operations. As part of its exit form Canada, AMC negotiated a share purchase of Ventures with Cineplex. A key term of the share purchase agreement was that Cineplex would acquire the shares of Ventures after Ventures divested itself of its interest in the Kennedy Commons 20 and Interchange 30 theatres (the "Theatres") - two movie theatres that were costly to operate and did not generate sufficient revenue.
On June 12, 2012, the share purchase agreement was entered into, with closing slated for July 12, 2012, one month later. During this one-month window, Ventures was unable to negotiate an early termination of the Theatres' leases. With the July 12, 2012, deadline looming, AMC decided to transfer Ventures' interest in the Theatres to a related corporation, AMC New Jersey ("AMC NJ"). AMC NJ acquired the assets and liabilities associated with the Theatres, for a payment from Ventures of $26M to compensate AMC NJ for the estimated costs of closing the Theatres; i.e., the value of the remaining leases, the costs of complying with remaining operating covenants, and other wind-down costs. On July 12, 2012, the acquisition was completed. Cineplex acquired Ventures' shares, Ventures was dissolved shortly thereafter, and its remaining assets were distributed to Cineplex.
The $26M payment was recorded as a business expense by Ventures in computing its income for its taxation year ending on July 11, 2012. Symmetrically, AMC NJ recorded a $26M income inclusion in its Canadian tax filings for its 2012 taxation year. In Cineplex's 2014 taxation year, Cineplex applied Ventures' non-capital loss carry forwards to its income, which included the $26M attributable to the payment to AMC NJ. The Minister of National Revenue (the "Minister")reassessed Cineplex's 2014 taxation year and disallowed the $26M attributable to the Ventures payment on the basis that it was a capital expenditure, and in particular, that the payment represented a "negative proceeds of disposition".
The Tax Court Decision
The Tax Court held that the $26M payment from Ventures to AMC New Jersey was on income account and therefore deductible under subsection 9(1) of the Act. In coming to this conclusion, the Tax Court examined the words of the asset transfer agreement, but also gave weight to evidence introduced by Cineplex on the context surrounding the formation of the agreement.3 Ultimately, the Tax Court found that the $26M payment was made as part of Ventures ceasing to do business in Canada. Cineplex follows Langille v The Queen4 and Tournier v The Queen,5 wherein the Tax Court previously held that such an expense is valid business expense, as well as the Canada Revenue Agency's public position in IT-359R2.6
The Department of Justice ("DOJ") argued that the sale constituted negative POD. On that issue, the Tax Court stated that "Parliament likely did not intend the concept of "proceeds of disposition," as used in the Act, to take on a negative value."7 The Tax Court looked at the definition of "proceeds of disposition" in section 54 of the Act, the capital gains formula in section 40 of the Act, and the ordinary meaning of the word "proceeds". In all three contexts, "proceeds" refers to an amount that is received or receivable, not a net figure, and is "inherently positive".8 As Ventures paid but did not receive any amount, the Tax Court dismissed the negative POD argument.
Finally, the DOJ argued in the alternative that due to the $26M payment arising from a condition of a share purchase agreement, this had the effect of transforming the payment from being on income account to capital. In dispensing with this argument, the Tax Court cited Shoppers Drug Mart, and held that the $26M was not converted into capital payments as a result of being made during a share sale.9
Takeaways
The Cineplex decision offers taxpayers the following four helpful takeaways:
- Contextual evidence surrounding a contract's formation may be used as an interpretive aid where it is relevant, although the text of the contract reigns supreme.
- Proceeds of disposition is an inherently positive concept.
- A business expense made in the course of a share purchase agreement remains a business expense - it is not transformed into a capital expense.
- A payment made to cancel a lease is a valid business expense provided the underlying lease was entered into for income earning purposes.
Footnotes
1. Cineplex Inc. v The King, 2026 TCC 15 [Cineplex]
2. Income Tax Act, RSC 1985, c. 1 (5th Supp), as amended.
3. Cineplex, para. 53.
4. Langille v The Queen, 2009 TCC 398, para. 14.
5. Tournier v The Queen, 2018 TCC 229, para. 12.
6. IT-359R2 – Premiums and Other Amounts with Respect to Leases, para. 11.
7. Cineplex, para. 56.
8. Cineplex, para. 57.
9. Cineplex, para. 65-66.
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