Surplus Cash and the Active Asset Test: Lessons from Ehresman

Key Takeaways

• No inference of intent: Courts rejected the claim that surplus cash was earmarked for decommissioning in the absence of contemporaneous reserves, allocations, or disclosures.

• Rational connection required: A reserve must be tied to a reasonably determined risk and quantified amount, not a vague future liability.

• Inaction is evident: silence in financial statements, a lack of allocation across business lines, and the absence of expert support outweigh post-sale explanations.

The Situation

Ken and Marianne Ehresman sold all shares of C.C.M. Resources Ltd., seeking to claim the lifetime capital gains exemption (LCGE). CRA denied the claim, asserting that CCM’s surplus cash and investments weren’t used in an active business. At the time of sale, CCM operated oil wells and a financial services business. The Ehresmans argued that large cash reserves were held to fund the inevitable decommissioning of the oil wells, an obligation that would require dismantling equipment and remediating land at the end of the wells’ useful life.

The Tax Court found the reserves unsupported, upheld CRA’s denial, and both appeals were dismissed. The result was the loss of LCGE treatment, materially reducing the value of the sale proceeds.

What Made the Difference

The “decommissioning reserve” rationale collapsed under scrutiny. While the Court accepted that decommissioning was inevitable, it found no contemporaneous evidence of a reserve: no liability recorded in financial statements, no estimate of costs, and no allocation of retained earnings to the oil business. The only provision on record was $100,000 disclosed to the CRA; far short of the millions claimed after the sale. No independent expert evidence was led to establish what decommissioning might reasonably cost, leaving the potential liability range undefined.

The absence of planning, documentation, and substantiation led the Court to treat CCM’s surplus cash as passive, not active, and deny LCGE access.

The Signal for Business Leaders

The Tax Court did not dismiss the idea that reserves for future obligations can qualify as active assets. In Ehresman, the issue was not whether decommissioning would occur. That was accepted as inevitable.

The problem was that no contemporaneous reserve, cost estimate, or allocation tied the surplus cash to that obligation. Silence in financial statements and the absence of expert support carried more weight than explanations offered after the fact.

The broader pattern is clear: outcomes in LCGE disputes often turn on whether future obligations are quantified, documented, and embedded in business records at the time. In cases where evidence is incomplete, judgment in how those gaps are addressed and framed often determines whether a position withstands scrutiny.

Case reference: Ehresman v. The King, 2025 TCC 78