Vancouver, British Columbia, Canada 03 June 2013 -- A Supreme Court decision in late May decided a long-running tax battle between Daishowa-Marubeni International and the federal government in favor of the forest products company.

On May 23, 2013, the Supreme Court of Canada issued a decision in Daishowa-Marubeni International Ltd.’s case dealing with the tax treatment of future obligations that are assumed by a purchaser of assets.

According to a commentary on the case from Cassels Brock & Blackwell LLP, at issue the Daishowa case was whether the estimated cost of reforestation obligations assumed by a purchaser of a timber licence should be included in computing the seller's proceeds of disposition. The Supreme Court held that the estimated cost of the reforestation obligations should not be included in the seller's proceeds of disposition.

The law firm says the principles established in the SCC's decision are relevant to any type of asset sale; however, the SCC's decision has particular relevance for the mining industry in which a purchaser of resource properties regularly assumes reclamation obligations of the seller.

Cassels Brock & Blackwell presents this background: In 1999 and 2000, Daishowa-Marubeni International Ltd. sold two Alberta timber mill divisions in separate asset sales to different purchasers. The assets of the timber mill divisions included the related timber licences. Under these timber licences, the owner of each timber licence was obligated to reforest the lands after it harvested the timber. The purchasers from Daishowa agreed to assume the reforestation obligations. 

In reporting its income from the asset sales, Daishowa did not include the estimated cost of the reforestation obligations as part of its proceeds of disposition. Subsequently, the Minister of National Revenue reassessed Daishowa to include such estimated cost in Daishowa's proceeds of disposition. There followed decisions by the Tax Court of Canada and the Federal Court of Appeal.

The Supreme Court held that the estimated cost of the reforestation obligations was not a separate existing debt and Daishowa was not required to include any portion of the estimated cost of the reforestation obligations in its proceeds of disposition.

Daishowa-Marubeni owns a pulp mill in Peace River, Alta.