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Utilization of Tax Losses AndDebt Restructuring
January 13, 2009James 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))
Loss denied to transferorLoss 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 propertyCost 1,200UCC 1,000FMV 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 ConceptConsistent definition of affected group used virtually throughout the stop-loss rulesSome similarity to related persons definition but there are significant differencesDe facto control testNarrower set of individuals are affiliated• spouses only
Triggering Accrued Losses- The Stop-loss Rules (Cont’d)
The Affiliated Persons ConceptRules for partnershipsUntil 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 ConceptLoss denied to transferorLoss stays with transferor until earliest of certain events occurs
Triggering Accrued Losses- The Stop-loss Rules (Cont’d)
Depreciable Property -- (Subsection 13(21.2))
Loss is denied to transferorTransferee has same capital cost and UCC equal to fair market valueTransferor acquires notional property of same class at difference between deemed proceeds and fair market valueTransferor 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))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))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 PropertyCost 1,200UCC 1,000FMV 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. HMTQ2008 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))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 placeSubsection 40(3.3) sets out preconditions for 40(3.4) to apply:
(i) Corporation, trust or partnership disposes of a non-depreciable capital property (subject to certain limited exceptions);(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(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))Subsection 40(3.5) defines the concept of identical property, as well as the period of ownership of a substituted property
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 However see Cascade, 2008 D.T.C. 2387
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
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. 2387Holding– The Court applied the principles of interpretation and referred
to Imperial Oil Ltd. v. R., 2006 SCC 46 and Canada TrustcoMortgage 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 2008-0274451E5Capital losses arising from a disposition of shares deemed to have been made under ss. 50(1) are notsubject to deferral or denial under ss. 40(3.4) or (3.6)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 2007-0221361R3Subsection 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 soAlter 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)
Similar to depreciable property rulesLoss denied and held in suspense until earliest of certain eventsSpecial rules to deal with changes to or disappearance of the loss propertySpecial 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))
Stop-loss rules for eligible capital propertyRules similar to ss. 40(3.3) and (3.4)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))
Stop-loss rules for accrued losses on inventory of a business that is an adventure or concern in the nature of trade Rules similar to ss. 40(3.3) and (3.4)Terminal loss is denied to the transferor until a triggering event occurs (the triggering events are same as for ss. 40(3.4)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))Taxpayer’s “superficial loss” is deemed to be nil Superficial loss defined in s. 54:
loss of a taxpayer from the disposition of property, subject to certain limited exceptions;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 at the end of the period, the taxpayer or an affiliated person owned or had a right to acquire the substituted property
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’sshareholder 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 66Avoid debt forgiveness and sell losses
Holdco
Opco
CommonShares100%
NoteCost 100FMV 60
non-capital losses
Purchaser
Paragraph 40(2)(e.1) and ATR 66Holdco
Opco
Subco
NoteCost 60FMV 60
Commonshares
Commonshares
NoteCost 100FMV 60
- Holdco sells Note toSubco for a Note
- 40(2)(e.1)
Triggering Accrued Losses- The Stop-loss Rules (Cont’d)
Paragraph 40(2)(e.1) and ATR 66
Triggering Accrued Losses- The Stop-loss Rules (Cont’d)
Holdco
Opco
CommonShares100%
NoteCost 60FMV 60
Losses (preserved)
- Subco winds up into Opco
- losses of Opco are preserved
- Holdco loses accrued capitalloss on Note
- Holdco sells Opco toPurchaser
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
PlanningNeed to devise strategies to utilize loss in hands of transferorBear in mind impact of acquisition of control rules on ability of transferor to use losses
Triggering Accrued Losses- The Stop-loss Rules (Cont’d)
Utilization And Preservation OfRealized Losses With An Affiliated
Corporate Group
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate GroupGeneral Overview
Two sets of rules• Affiliated group
• CRA and the Act are generally indulgent• Unaffiliated group
• Hostile statutory and administrative regimee.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
Deemed year endUsual carryforward rulesNo carryback generallySubsection 87(2.11) - exception to no carrybackruleSubsection 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, B and C amalgamateCRA says only A is the parent for subsection 87(2.11) purposes
A
B
C
100%c
100%
100%
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)Subsection 87(2.11) -- Example 2
A1, A2, B1 and B2 amalgamateCRA says subsection 87(2.11) not applicable
X
A1 B1
B2A2
100%100%
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)
Loss Utilization TechniquesTransfer of appreciated assets to affiliated losscoand sale to third party at FMVSubsection 69(11) not applicable because affiliatedSubsection 55(3)(a) -- more relaxed rulesProperty should not change character
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)Shifting Interest Expense
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]
ProfitableSubsidiary
100%
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)Shifting Interest Expense
Parent incorporates two new subsidiaries, Lossco and SharecoParent 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
ParentcoLosses
LosscoSharecoProfitableSubsidiary
Loan (interest)
p/s
Loan 0%
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)Shifting Interest Expense
Parent earns interest incomeLossco incurs lossesStructure 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
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
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
Loss corporation gets recapture, capital gain and interest incomeProfitable corporation gets interest deduction and CCAParagraph 13(7)(e) may restrict write up of asset
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)
Self HelpNon-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
See discussion above regarding stop-loss rulesAlternative to transferring profitable business directly to loss corporationNeed adequate financial contribution by Lossco13(7)(e)
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)Partnerships between Profitable and Loss Corporations
Income is shares between profitable and loss corporationMust be adequately documented and legally effectiveMust have appropriate profit sharing ratioConsider section 103
e.g. West Topaz
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)Avoiding Acquisitions of Control
Be carefulSubsection 69(11) – especially inventoryConsider all anti-avoidance provisions
• substance is criticalDuha Printers
• SCC• Pre-GAAR• Aggressive planning
Utilization And Preservation Of Realized Losses With An Affiliated
Corporate Group (Cont’d)Transferring losses outside the group
This was much easier pre-GAAR and pre-enactment of subsection 13(21.2), subsections 40(3.3) to (3.6) and related provisionsCRA will fight these structures aggressivelyOSFC 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. HMTQ2009 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 ondividend 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))La Survivance
Controlmeans de jure controlDuha 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 personsRules re amalgamationsSubsection 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 year-ends for Pubco)
Treatment Of Tax Losses On An Acquisition Of Control (Cont’d)
Impact of acquisition of controlNo capital loss carryforwardsNo property loss carryforwardsWrite-down of assets with accrued losses and possible write up of appreciated assetsBusiness losses streamedSame business test – Garage MontplaisirIncome 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 afteran 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 rulescommercial obligationforgiven amount80(2) rules• interest• debt for shares• debt for debt
Debt Restructuring, Debt Forgiveness and Loss Preservation (Cont’d)
Debt forgiveness rulesAmalgamations and wind-upsDebt parkingApplication of forgiven amountStatute Barred Debt – 80.01(9)
Hare v. HareRecent 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 paymentDebt for debtEquity for debtParagraph 40(2)(e.1)Debt parking - the 80% test
Managing Debt Forgiveness
Managing Debt Forgiveness
Section 80.04Amalgamation or wind-upUtilizing expiring loss carryforwardsStatute-barred debtAcquisition of control issues
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