A difficult case: when is an Intangible Expenditure a Capital Expense?

September 14, 2017 | by George Evans

On April 24, 2017, the Tax Court of Canada rendered its judgment in Armour Group Ltd. v. The Queen. This case grapples with whether the taxpayer's land transactions with the Province of Nova Scotia resulted in deductible business income or a capital expenditure.

What can we learn from this key decision? Our Tax Foresight analysis of the case follows. If you would like to try your own, please login to Tax Foresight here.

Armour Group

Armour Group Ltd. v. The Queen, 2017 TCC 65

Factual Background

The transactions giving rise to the appeal in Armour Group were carried out by the taxpayer's wholly-owned subsidiary, Founders Square Limited (“FSL”). FSL, an investment and real estate company, entered into an agreement to lease and develop office space on property owned by the Province of Nova Scotia (“Founders Square”). The Province later defaulted on its obligation under this agreement to rent office space from FSL. As a result, the parties entered into a Settlement Agreement in which the Province granted FSL an irrevocable option to purchase Founder’s Square, along with an assignment of the ground lease, for $2.4 million. The $2.4 million consideration would be funded by way of a set-off against credit owing by the Province to FSL under the Settlement Agreement.

To execute the Settlement Agreement, FSL entered into a separate Transfer Agreement with ADL, another wholly-owned subsidiary of the taxpayer. FSL assigned the option to purchase Founder’s Square to ADL, along with $160,000 of the $2.4 million owed to FSL under the Settlement Agreement. In exchange, ADL agreed to provide a new ground lease to FSL for nominal rent. Accordingly, FSL surrendered the existing ground lease to the Province (the “Surrender Agreement”), the Province transferred the fee simple interest in Founder’s Square to ADL, and FSL entered into a new long-term ground lease with ADL.

After deducting the $160,000 paid to ADL, $2.24 million was the remaining credit available to FSL under the Settlement Agreement. The taxpayer took the position that the $2.24 million paid by way of set-off was fully deductible as consideration for surrender of the Ground Lease. However, the Minister characterized the $2.24 million as consideration to acquire interest in real property, and reassessed the taxpayer pursuant to paragraph 18(1)(b) of the Income Tax Act. The taxpayer appealed.


The Court dismissed the taxpayer's appeal. Justice B. Paris characterized the full $2.4 million as consideration provided to the Province to acquire fee simple interest in Founder's Square. The Court's decision hinged on two key factors: (i) the objective intentions of the parties; and (ii) due to an operation in law.

In order to determine what consideration FSL provided to the Province for the Surrender Agreement, the Court first analyzed the objective intentions of the parties at the time they entered into the agreement. The Surrender Agreement stated that the ground lease surrender was given in exchange for a payment of $10 and “other good and valuable consideration.” Justice B. Paris characterized this consideration as both nominal and ambiguous. He further held that, in such circumstances, the Court may allow extrinsic evidence to assess the intentions of the parties. This, however, proved fatal to the taxpayer’s appeal. The taxpayer called just one witness to testify—its own President and CFO—and offered no explanation for its failure to request the Province’s testimony. As such, the Court inferred that the Province’s testimony would have been unfavourable to the taxpayer.

The court was also satisfied that FSL paid $2.24 million to the Province in order for ADL to acquire a fee simple interest in Founders Square, and that the payment was on capital account. Justice B. Paris affirmed the principle that “one cannot give what one does not own”. This meant that ADL needed to acquire a fee simple ownership of Founders Square before granting a new ground lease to FSL. It is noteworthy that the Surrender Agreement stipulated that “the delivery of this Surrender and the Conveyance shall in no way constitute a merger of the fee simple title and the leasehold title in the Lands”. Even in the presence of this express provision, the Court determined that FSL’s surrender of the ground lease to the Province caused it to merge with the fee simple title by operation of law.

Tax Foresight Case Analysis

  • Tax Foresight correctly predicts with 88% confidence that the transaction in Armour Group Ltd. constituted a capital expenditure.
  • If it were reasonably expected that the expenditure would have led to revenues exceeding the amount of the expenditure, Tax Foresight predicts capital expenditure with 63% confidence.
  • If the expenditure had resulted in the removal of at least one competitor, or lead to a reduction in competition, Tax Foresight predicts capital expenditure with 95+% confidence.
  • If the taxpayer had made payments of this type in previous taxation years, Tax Foresight predicts current or income expenditure with 74% confidence.

Intangible Expenditure Insights

  • The outcome of intangible expenditure cases is almost evenly split: 53% of cases have resulted in a finding of capital expenditure, and 47% have been characterized as current or income expenditure.
  • In 95% of current expenditure cases, the expenditure is not reasonably expected to result in capital receipts that will exceed the amount of the expenditure.
  • Each time you run our Intangible Expenditure Classifier or Case Finder, you apply the entire body of case law to your client’s situation.
  • Want to make sure you are considering all the new intangible expenditure cases when you give your advice? Tax Foresight reflects the newest case law and takes every case into account when providing its prediction.

Tags: Tax


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