Utilization of Tax Losses And
Debt Restructuring
January 13, 2009
James A. Hutchinson
Triggering Accrued Losses
-- The Stop-loss Rules
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™The Old Rules -- Depreciable Property
(Subsection 85(5.1))
ƒ Loss denied to transferor
ƒ Loss transferred to transferee
• e.g. Corporation A with accrued losses on
depreciable property transfers business to
partnership with corporation B in exchange for
51% partnership interest
•
Depreciable property
Cost
UCC
FMV
1,200
1,000
100
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™The Old Rules -- Depreciable Property
(Subsection 85(5.1))
• No loss to corporation A
• Partnership can claim $1,000 of CCA over time
on asset worth $100
• Corporation B, the 49% partner, gets CCA of
$490 over time on asset in which it has an
economic interest of $49
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™The Affiliated Persons Concept
ƒ Consistent definition of affected group used
virtually throughout the stop-loss rules
ƒ Some similarity to related persons definition
but there are significant differences
ƒ De facto control test
ƒ Narrower set of individuals are affiliated
• spouses only
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™The Affiliated Persons Concept
ƒ Rules for partnerships
ƒ Until 2004 Federal Budget, no specific rules
for trusts
• 2004 Budget Amendments shift focus from
trustees to contributors and beneficiaries
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™The Basic Concept
ƒ Loss denied to transferor
ƒ Loss stays with transferor until earliest of certain
events occurs
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Depreciable Property -- (Subsection
13(21.2))
ƒ Loss is denied to transferor
ƒ Transferee has same capital cost and UCC equal
to fair market value
ƒ Transferor acquires notional property of same
class at difference between deemed proceeds and
fair market value
ƒ Transferor can claim CCA (and eventually a
terminal loss) on notional property
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Depreciable Property -- (Subsection 13(21.2))
ƒ Loss denied to transferor until
•
•
•
•
•
Property no longer held by affiliate
Change to non-income producing use
Change of residence or tax status of transferor
Acquisition of control of transferor
Non-subsection 88(1) wind up of corporate
transferor
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Depreciable Property -- (Subsection 13(21.2))
ƒ e.g. Corporation A with accrued losses on
depreciable property transfers depreciable property
to partnership with corporation B in exchange for
51% partnership interest
• Depreciable Property
Cost
UCC
FMV
1,200
1,000
100
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Depreciable Property -- (Subsection 13(21.2))
• No loss to corporation A
• Partnership can claim $100 of CCA over time on
asset worth $100
• Corporation A can claim CCA of $900 on notional
asset
13(21.2) – Gary Landrus v. HMTQ
2008 TCC 274
™Facts:
– TP was a limited partner of a partnership (“RII”)
formed to acquire a condo building
– RII and related partnership (“RI”), which owned
adjacent condo building, disposed of buildings to a
third partnership (“RPM”) – limited partners of RI and
RII received interests in RPM
– Terminal losses on disposition allocated to limited
partners of RI and RII and deducted under 20(16),
ITA
– TP reassessed under GAAR – deduction of terminal
losses disallowed because TP allegedly retain
“economic interest” in transferred property
– TP appealed to TCC
13(21.2) – Landrus (cont’d)
™ Holding:
– Appeal allowed: GAAR did not apply; assessment vacated
– Disposition by RII to RPM was an avoidance transaction
because primarily arranged for tax benefit (245(3))
– However, resulting terminal loss did not constitute a misuse or
abuse of the ITA (245(4)) – no policy prohibiting losses on a
transfer between related parties or “economic unit”
– 13(21.2) (formerly 85(5.1)) denies terminal losses on transfers
of depreciable property between partnerships in certain
circumstances; otherwise, TPs allowed to claim terminal
losses (i.e., in the present case, TP not a majority interest
partner)
– GAAR not to fill gaps in legislation
– NOTE: Landrus currently under appeal
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™ Non-depreciable property -- (Subsections 40(3.3)-(3.6))
ƒ Subsection 40(3.4) provides that the transferor’s loss from the
disposition is to be nil and held in suspense until certain triggering
events take place
ƒ Subsection 40(3.3) sets out preconditions for 40(3.4) to apply:
ƒ (i) Corporation, trust or partnership disposes of a nondepreciable capital property (subject to certain limited
exceptions);
ƒ (ii) during the 61-day period commencing 30 days before and
ending 30 days after the disposition, the transferor or an
affiliated person acquires the same or an identical property (the
“substituted property”); and
ƒ (iii) at the end of the period, the transferor or an affiliated person
owns the substituted property
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™ Non-depreciable property -- (Subsections 40(3.3)-(3.6))
ƒ Subsection 40(3.5) defines the concept of identical property, as well
as the period of ownership of a substituted property
ƒ CRA view is that 40(3.3) and (3.4) "apply" for 40(3.5)(c) even if
the corporation is wound up before the period expires
ƒ However see Cascade, 2008 D.T.C. 2387
ƒ Subsection 40(3.6) applies where a taxpayer disposes of a share
(other than a distress preferred share) of an affiliated corporation
which continues to be affiliated after the disposition
ƒ The loss is deemed to be nil and is added to the ACB of
the transferor’s shares of the affiliated corporation
Subsection 40(3.6), ITA
™L. Milton Hess v. HMTQ 2008 TCC 4,
para. 10:
“…the opening words of subsection
40(3.6)… refer to a corporation buying
back its own shares.”
Cascades Inc. v. R., 2008 D.T.C. 2387
™Facts
– Taxpayer participated in a financial restructuring plan
– Plan included the exchange of all ordinary shares of PII held by minority
shareholders for new ordinary shares of taxpayer
– Taxpayer was the sole shareholder of Corporation C (one preferred share)
– Taxpayer sold all ordinary shares of PII held to C for a capital loss in
exchange for 33,025,966 common shares of C
– Capital loss = $15,941,608 (ACB of $68,783,154 minus $52,841,546)
– C bought back preferred share that was issued to taxpayer
– P and C amalgamated 26 days afterwards
– All of ordinary shares that PII held were exchanged for ordinary shares of the
taxpayer
– Category A and B preferred shares of PII were converted into category A and
B preferred shares of C
– Taxpayer was only shareholder of converted new shares
– Minister reduced the capital loss by $15,941,608 - the loss was deemed to be
nil under ss. 40(3.4)
– Taxpayer appealed Minister’s loss determination for taxation year
Cascades Inc. v. R., 2008 D.T.C. 2387
™Issue
– Whether the taxpayer is entitled to claim the
$15,941,608 loss immediately when all of its shares
in PII were disposed in favour of C
™Taxpayer Position
– Presumption in s. 40(3.5)(c) does not apply in this
case
• 40(3.5)(c) only applies if ss. 40(3.3) and s. 40(3.4)
apply
– In particular condition in s. 40(3.3)(c) was not met
Cascades Inc. v. R., 2008 D.T.C. 2387
™ CRA Technical Interpretations
– ss. 40(3.5)(c) - when a transferor disposes of a share of the
capital stock of a corporation that is then merged with one or
more other corporations, the corporation formed on the
merger is deemed to own the share as long as it is affiliated
with the transferor
– Technical Interpretation 2003-0182977 and Technical
Interpretation 2005-014119 state that following the winding-up
of the company, the parent company is deemed to own the
share while it is affiliated with the transferor
– Necessary and appropriate to apply the presumption in ss.
40(3.5)(c) for the purposes of applying ss. 40(3.3) and ss.
40(3.4)
Cascades Inc. v. R., 2008 D.T.C. 2387
™ Holding
– The Court applied the principles of interpretation and referred
to Imperial Oil Ltd. v. R., 2006 SCC 46 and Canada Trustco
Mortgage Co. v. R., 2005 SCC 54
• Statute must be interpreted in order to achieve consistency, predictability and
fairness so that taxpayers can manage their affairs intelligently
– Nothing to indicate that ss. 40(3.5)(c) must be used to
determine whether the loss is deemed to be nil under ss.
40(3.4)
• On the contrary, subsection 40(3.5)(c) only applies if subsections 40(3.3) and
40(3.4) apply first
– The stop-loss rule in ss. 40(3.4) is a specific anti-avoidance
measure to prevent taxpayers from immediately recognizing a
latent capital loss on non-depreciable capital property – not
the case here
Cascades Inc. v. R., 2008 D.T.C. 2387
™Holding (Cont…)
– In order for ss. 40(3.3)(c) to apply, the transferor or
an affiliated person must own the substituted
property at the end of the 61 day period specified in
ss. 40(3.3)(b)
– Since the shares disappeared in the course of a
merger and no longer existed, the taxpayer could
not be said to have still possessed (or
repossessed) them within the 61 day period
– Therefore taxpayer not subject to ss. 40(3.4)
because conditions set out in ss. 40(3.3) were not
all met
– NOTE: Cascades currently under appeal
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™CRA Interpretation 2008-0274451E5
ƒ Capital losses arising from a disposition of shares
deemed to have been made under ss. 50(1) are not
subject to deferral or denial under ss. 40(3.4) or
(3.6)
ƒ Closing portion of ss. 50(1) deems the taxpayer to
have disposed of the shares of the corporation at
the end of the taxation year for proceeds equal to
nil and to have reacquired the shares immediately
after the end of the year at a cost equal to nil
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™CRA Interpretation 2007-0221361R3
ƒ Subsection 40(3.4) does not suspend losses where
alter ego trust makes gift of shares of capital
property to qualified donee pursuant to provision in
trust’s indenture that gives its trustees discretion to
do so
ƒ Alter ego trust will wind-up, at which point any
suspended capital losses will be realized under s.
40(3.4)(b)(i) as it will not be possible for the alter
ego trust to be affiliated with any person or
partnership upon winding-up
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Non-depreciable property -- (Subsection
40(3.3)ff)
ƒ Similar to depreciable property rules
ƒ Loss denied and held in suspense until earliest of
certain events
ƒ Special rules to deal with changes to or
disappearance of the loss property
ƒ Special rules where shares with accrued losses
are redeemed by affiliated corporation
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Eligible capital property – (Subsections
14(12) and (13))
ƒ Stop-loss rules for eligible capital property
ƒ Rules similar to ss. 40(3.3) and (3.4)
ƒ Terminal loss is denied to the transferor
until a triggering event occurs (the triggering
events are same as for ss. 40(3.4)
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Accrued losses on inventory – (Subsections
18(14) and (16))
ƒ Stop-loss rules for accrued losses on inventory of a
business that is an adventure or concern in the
nature of trade
ƒ Rules similar to ss. 40(3.3) and (3.4)
ƒ Terminal loss is denied to the transferor until a
triggering event occurs (the triggering events are
same as for ss. 40(3.4)
ƒ Similar rule has been in the Act for property held in
a money lending business (ss. 18(13))
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™ Superficial losses – (Subsection 40(2)(g)(i))
ƒ Taxpayer’s “superficial loss” is deemed to be nil
ƒ Superficial loss defined in s. 54:
ƒ loss of a taxpayer from the disposition of property, subject
to certain limited exceptions;
ƒ where the same or identical property (the “substituted
property”) was acquired during the 61 day period
commencing 30 days prior to the disposition by the
taxpayer or an affiliated person; and
ƒ at the end of the period, the taxpayer or an affiliated
person owned or had a right to acquire the substituted
property
ƒ Amount of the denied loss is added to the ACB of the
substituted property – loss transferred to the transferee
40(2)(g) – Gregorina Alessandro v.
HMTQ 2007 TCC 1373
™Facts:
– For 1994, Minister reassessed and included shareholder benefit
in TPs income based on non-arm’s length purchase of real
property from a corporation of which TP was a shareholder
– Shareholder benefit = FMV of property less balance of TP’s
shareholder account less declare, unpaid dividend include in
TPs income
– For 1997, Minister reassessed and denied carry-back to 1994 of
ABIL from interest-free loans advanced to another corporation
that became insolvent because TP not a shareholder
– TP appeal to TCC challenging calculation of shareholder benefit,
denial of ABIL in 1997 and resulting denial of carry-back to 1994
40(2)(g) –Alessandro (cont’d)
™Holding:
– Appeals allowed
– For 1994, shareholder benefit reduced on account of
shareholder advances made by TP
– For 1997, ABIL (and resulting carry-back) reduced to account for
TP’s overstatement of loans advanced
• TP satisfied burden of proof that conditions under 40(2)(g)(ii),
ITA, (triggered to 50(1) election for bad debts) were met as
loans advanced for purpose of earning income (e.g.,
possibility of earning dividend income)
• While not a direct shareholder, TP had direct and indirect
control of corporation and its shareholders, which meant TP
could cause dividends to be paid to her
– Minister ordered to reassess accordingly
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Paragraph 40(2)(e.1) and ATR 66
ƒ Avoid debt forgiveness and sell losses
Holdco
Common
Shares
100%
Note
Cost 100
FMV 60
Opco
non-capital losses
Purchaser
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Paragraph 40(2)(e.1) and ATR 66
Holdco
Common
shares
Note
Cost 60
FMV 60
- Holdco sells Note to
Subco for a Note
- 40(2)(e.1)
Opco
Common
shares
Subco
Note
Cost 100
FMV 60
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Paragraph 40(2)(e.1) and ATR 66
Holdco
- Subco winds up into Opco
- losses of Opco are preserved
Common
Shares
100%
Note
Cost 60
FMV 60
Opco
Losses (preserved)
- Holdco loses accrued capital
loss on Note
- Holdco sells Opco to
Purchaser
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™For an interesting ruling regarding
40(2)(e.1), 111, 13(21.2) and 80, ITA, see
Ruling 2008-0266441R3
Triggering Accrued Losses
- The Stop-loss Rules (Cont’d)
™Planning
ƒ Need to devise strategies to utilize loss in hands
of transferor
ƒ Bear in mind impact of acquisition of control
rules on ability of transferor to use losses
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group
™General Overview
ƒ Two sets of rules
• Affiliated group
•
CRA and the Act are generally indulgent
• Unaffiliated group
•
Hostile statutory and administrative regime
e.g. Acquisition of control rules,
69(11), GAAR
• 1995 change in CRA’s position from related
group to affiliated group
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Amalgamations
ƒ
ƒ
ƒ
ƒ
Deemed year end
Usual carryforward rules
No carryback generally
Subsection 87(2.11) - exception to no carryback
rule
ƒ Subsection 87(11)
• Possible capital gain on disposition of shares on
amalgamation
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Subsection 87(2.11) -- Example 1
A
100%c
B
100%
C
ƒ A, B and C amalgamate
ƒ CRA says only A is the parent for subsection
87(2.11) purposes
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Subsection 87(2.11) -- Example 2
X
100%
A1
100%
B1
100%
A2
B2
ƒ A1, A2, B1 and B2 amalgamate
ƒ CRA says subsection 87(2.11) not applicable
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Loss Utilization Techniques
ƒ Transfer of appreciated assets to affiliated lossco
and sale to third party at FMV
ƒ Subsection 69(11) not applicable because
affiliated
ƒ Subsection 55(3)(a) -- more relaxed rules
ƒ Property should not change character
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Shifting Interest Expense
ƒ There are a variety of techniques to shift interest
income and expense between affiliated
corporations
• e.g. Parent has loss subsidiary, Parent borrows
from bank and subscribes for common shares of
subsidiary
• Interest charges reduce Parent’s income and cash
infusion generates profit to subsidiary
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Shifting Interest Expense
• Where Parent is loss corporation, more
complicated arrangements are required
Parentco
[Losses]
100%
Profitable
Subsidiary
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Shifting Interest Expense
ƒ Parent incorporates two new subsidiaries,
Lossco and Shareco
ƒ Parent borrows money and lends money to
Lossco bearing interest; Lossco subscribes for
preferred shares in Shareco; Shareco lends
money interest free to Parent
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Shifting Interest Expense
Parentco
Losses
Loan
(interest)
Loan 0%
Profitable
Subsidiary
p/s
Shareco
Lossco
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Shifting Interest Expense
ƒ Parent earns interest income
ƒ Lossco incurs losses
ƒ Structure is unwound; Lossco amalgamates
with profitable subsidiary
Parentco
Subsidiary (Losses)
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Shifting Interest Expense
ƒ CRA had indicated in a 2002 advance income tax
ruling that while tax loss consolidation within an
affiliated group is generally permissible,
refreshing of a loss company’s loss in a manner
which results in a profitable affiliate incurring
interest expense which generates a non-capital loss
is not permissible.
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Shifting Interest Expense
ƒ Technical News No. 25 clarifies this
• Creating loss and using it for 3-year loss carry
back is acceptable
• Carrying loss beyond original 7 (now 20) year
loss carry forward period is not acceptable.
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Sell Assets in exchange for Interest Bearing
Debt
ƒ Loss corporation gets recapture, capital gain and
interest income
ƒ Profitable corporation gets interest deduction and
CCA
ƒ Paragraph 13(7)(e) may restrict write up of asset
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Self Help
ƒ Non-use of discretionary deductions
• Loss corporation should not claim discretionary
deductions, e.g. CCA
• Consider claiming CCA on slow write off assets
but not on fast write off assets
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Partnerships between Profitable and Loss
Corporations
ƒ See discussion above regarding stop-loss rules
ƒ Alternative to transferring profitable business
directly to loss corporation
ƒ Need adequate financial contribution by Lossco
ƒ 13(7)(e)
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Partnerships between Profitable and Loss
Corporations
ƒ Income is shares between profitable and loss
corporation
ƒ Must be adequately documented and legally
effective
ƒ Must have appropriate profit sharing ratio
ƒ Consider section 103
ƒ e.g. West Topaz
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Avoiding Acquisitions of Control
ƒ Be careful
ƒ Subsection 69(11) – especially inventory
ƒ Consider all anti-avoidance provisions
• substance is critical
ƒ Duha Printers
• SCC
• Pre-GAAR
• Aggressive planning
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Transferring losses outside the group
ƒ This was much easier pre-GAAR and preenactment of subsection 13(21.2), subsections
40(3.3) to (3.6) and related provisions
ƒ CRA will fight these structures aggressively
ƒ OSFC Holdings is first Federal Court of Appeal
GAAR decision and deals with a tax loss
utilization scheme
Utilization And Preservation Of
Realized Losses With An Affiliated
Corporate Group (Cont’d)
™Transferring losses outside the group
• FCA held sale of tax losses to an arm’s length
party was “abuse” of the Act read as a whole
• Canada Trustco and Kaulius are first Supreme
Court of Canada GAAR decisions
• Kaulius companion case to OSFC
• Investors lose
• Canada Trustco leveraged lease transaction,
taxpayer is successful
• Extensive analysis of methodology of GAAR
GAAR – Earl Lipson v. HMTQ
2009 SCC 1
™ Facts:
– TP and wife purchased family residence (“Home”)
– Wife borrows from bank (“Share Loan”) to buy shares of family
corporation from TP (“Shares”) at FMV
– TP and Wife take out mortgage on Home from bank
(“Mortgage”) and use it to repay Share Loan
– For ’94, ’95, ’96, TP, relying on 20(1)(c), 20(3), 73(1) & 74.1,
ITA, deducted interest on Mortgage and reported taxable
dividends on Shares
– Minister reassessed – interest deductions denied
– TP’s appeal to TCC dismissed; TP’s appeal to FCA dismissed
– TP appealed to SCC
GAAR – Lipson (cont’d)
™ Holding:
– Appeal dismissed based on GAAR
– Transactions were avoidance transactions – TP conceded tax
benefit of interst deductibility
– 20(1)(c) and 20(3) not misused or abused; rather, operation of
73(1) and 74.1(1) allowed TP to deduct interest to reduce tax on
dividend and other income – not otherwise available if TP and
wife dealt at arm’s length
– Purchase of Shares at FMV not determinative
– Automatic operation of 74.1(1) did not matter
– Allowing 74.1(1) to reduce TP’s income tax frustrates purpose of
the attribution rules – automatic operation of a particular section
may subject otherwise legitimate transaction to GAAR
– Taking advantage of non-arm’s length relationship may subject
otherwise legitimate transactions to GAAR
GAAR – HMTQ v. John MacKay
et al. 2008 FCA 105
™ Facts:
– TPs agreed to purchase shopping centre (“Property”) subject to
foreclose of Bank’s mortgage (“Mortgage”)
– Bank formed limited partnership with subsidiary (“Partnership”) and
Mortgage interest to Partnership
– TPs purchased units in Partnership
– Property transferred to Partnership on completion of foreclosure
proceedings
– Partnership wrote down value of Property under 10(1), ITA, generating
$6M loss allocated to TPs, who made corresponding deductions against
their income
– Minister reassessed under GAAR – loss deductions and carry-forwards
denied
– TPs’ appeal to TCC allowed – series of transactions was bona fide and
no particular transaction was an avoidance transaction; ∴ GAAR did not
apply; Minister appealed to FCA
GAAR – MacKay et al. (cont’d)
™Holding:
– Appeal allowed
– Although series of transactions had a bona
fide business purpose, the transactions that
resulted in the transfer of the accrued loss
on the Mortgage from the Bank to the
Partnership to enable TPs to deducted
losses constituted an abusive avoidance
transaction
CRA Roundtable 2008
™Current Audit Projects – Artificial Losses
– Assessed about 75 cases
– Capital losses of $2.3 Billion
– Several different methods utilized
– Taxpayers are currently manufacturing High
ACB shares with little value for future use
– Several cases currently before courts
CRA Roundtable 2008 (Cont…)
™Current Audit Projects – Business
Losses
– 2004 to 2006 – 3,000 Participants
– Losses claimed of $400 million
– Purchased on basis of $1 paid = $5 loss
Treatment Of Tax Losses On An
Acquisition of Control
Treatment Of Tax Losses On An
Acquisition Of Control
™Deemed year end (249(4); 256(9))
ƒ La Survivance
™Control
ƒ means de jure control
ƒ Duha Printers – unanimous shareholder
agreements are relevant
™Test is acquisition of control not change of
control
Treatment Of Tax Losses On An
Acquisition Of Control (Cont’d)
™Need an identifiable group acting in concert
to be a group
™Exceptions in Act for related persons
™Rules re amalgamations
™Subsection 256(7) changes
Subsection 256(7)
• CRA Conference – October 5, 2007
– Private Corporation (Holdco) controlled by a group of three
persons amalgamates with a Public Corporation to form
Amalco
– Shareholders of Pubco receive non-voting shares of Amalco –
therefore shareholders of Holdco control Amalco
– Determination of the number of year-ends that result
– Taxation years of Holdco and Pubco that would otherwise
have ended after the amalgamation are deemed to have
ended immediately before the amalgamation (s. 87(2)(a))
– Further, group of former shareholders of Holdco will
technically be deemed to have acquired, immediately before
the amalgamation, control of Pubco pursuant to ss.
256(7)(b)(ii)
• ss. 249(4)(a) - generates a deemed taxation year-end with
respect to Pubco immediately before the time that is
immediately before the amalgamation (two deemed yearends for Pubco)
Treatment Of Tax Losses On An
Acquisition Of Control (Cont’d)
™Impact of acquisition of control
ƒ No capital loss carryforwards
ƒ No property loss carryforwards
ƒ Write-down of assets with accrued losses and
possible write up of appreciated assets
ƒ Business losses streamed
ƒ Same business test – Garage Montplaisir
ƒ Income test -- Manac
Proposed Amendment - ss. 111(4)
™ Subsection 111(4)
– A corporation that undergoes an acquisition of control is required to recognize
all of its accrued capital losses on property that the corporation owns at that
time
– The newly-realized capital losses, together with the existing net capital losses
cannot be used after the acquisition of control
™ New ss. 111(12)
– Extends ss. 111(4) to also apply to a corporation’s accrued capital gains and
losses resulting from currency fluctuations on debt liabilities denominated in a
foreign currency
– Under the old rules, capital gains and losses resulting from foreign currency
fluctuations on a corporation’s debt liabilities were not subject to these rules
– For the purposes of ss. 111(4), if at any time a corporation owes a foreign
currency debt, the corporation is deemed to own, immediately before that
time, a property with an adjusted cost base (ACB) and fair market value
(FMV) determined by the formulas contained in ss. 111(12)(a) and (b)
– Establishing an ACB and an FMV for this notional property allows for the
calculation of capital losses or gains
Proposed Amendment - ss. 111(4)
™ New ss. 111(13)
– Provides that for the purposes of ss. 111(12) and ss. 40(10)
and (11), new borrowings under an existing credit facility after
an acquisition of control will be treated as a separate debt
™ Application of ss. 111(12) and (13)
– Will apply to acquisitions of control after March 7, 2008, other
than acquisition of control that occurs before 2009, where the
person acquiring control are obligated to acquire control
pursuant to the terms of an agreement in writing made by
them on or before March 7, 2008
– Corporations will also be able to elect to have the new ss.
111(12) and ss. 111(13) apply to acquisitions of control that
occur after 2005
Debt Restructuring, Debt
Forgiveness and Loss Preservation
Debt Restructuring, Debt Forgiveness
and Loss Preservation
™Debt forgiveness rules
ƒ commercial obligation
ƒ forgiven amount
ƒ 80(2) rules
• interest
• debt for shares
• debt for debt
Debt Restructuring, Debt Forgiveness
and Loss Preservation (Cont’d)
™Debt forgiveness rules
ƒ
ƒ
ƒ
ƒ
Amalgamations and wind-ups
Debt parking
Application of forgiven amount
Statute Barred Debt – 80.01(9)
ƒ Hare v. Hare
ƒ Recent retroactive amendments to the Ontario
Limitations Act permit business parties to
extend the limitation period
Debt Restructuring Techniques
(Avoiding Debt Forgiveness)
Debt Restructuring Techniques
(Avoiding Debt Forgiveness)
™Moratorium on payment
™Debt for debt
™Equity for debt
™Paragraph 40(2)(e.1)
™Debt parking - the 80% test
Managing Debt Forgiveness
Managing Debt Forgiveness
™Section 80.04
™Amalgamation or wind-up
™Utilizing expiring loss carryforwards
™Statute-barred debt
™Acquisition of control issues