Cineplex – Tax Court of Canada finds a payment to an affiliate to assume lease obligations, so as to permit a share sale of the payer, was currently deductible

A Canadian company with a loss-generating movie-theatre business (“Ventures”) was required to discontinue two of its theaters as a condition to the sale of its shares to Cineplex Inc. To accomplish this, Ventures agreed with its New Jersey affiliate (“AMCNJ”) to sell the assets relating to the two theatres to AMCNJ for a purchase price of $0.7 million, satisfied by the assumption of liabilities in that amount, and to make a payment (the “Payment”) to AMCNJ of $26.6 million in consideration for AMCNJ assuming the balance of its future obligations in respect of the two discontinued theatres, mostly the assumption of the remaining lease obligations.

In finding that the Payment was a currently deductible expense of Ventures, MacPhee J characterized the Payment as “a specific ‘commutation payment’ made to eliminate or reduce a future ongoing expense of a current nature for Ventures,” and quoted with approval the statement in Langille that:

As a general rule, there is no reason that business shutdown or termination expenses incurred post-closure of operations cease to be deductible business expenses in ordinary, commercial, and business-like circumstances.

Respecting the submission of the Crown that the Payment represented negative proceeds of disposition resulting from the sale of the two theaters, MacPhee J stated his view that “Parliament likely did not intend ‘proceeds of disposition’ to be negative in value.” Furthermore, the fact that the Payment had been made as a result of a share sale did not have the effect of converting it into a capital expenditure.

Neal Armstrong. Summary of Cineplex Inc. v. The King, 2026 TCC 15 under s. 18(1)(b) – capital expenditure v. expense - start-up and close-down expenditures.