CRA is reassessing Deans Knight for avoiding the loss-streaming rules

CRA is proposing to reassess Deans Knight for $22.7M by denying use of pre-2009 tax losses (mostly SR&ED credits and deductions to be more precise) which Deans Knight deducted from the profits of its new business as a bond investor.  CRA is alleging that there was an acquisition of control in 2009, or that GAAR should be applied.

In 2008 and 2009, all of the (publicly-listed) shares in the capital of Deans Knight, and all of its assets, were transferred to a new holding company (Forbes), and it issued a debenture for $3 million to a private company (Matco) which was mostly convertible into non-voting rather than voting shares, presumably to avoid a control change.  It then issued $100M of voting common shares under a public offering (now representing most of its shares), with the proceeds used in its newly-established bond business.  The existing shareholders at the time of the IPO (Matco and Forbes) effectively received part payment for the tax losses through dilution of the new investors.

Deans Knight now is distributing all its assets as a stated capital distribution other than the tax reassessment amount and $1.2 million to pursue a tax appeal.  Minor changes to the 2009 reorganization would have complied with the additional technical requirements of new draft s. 256.1 (re 75% FMV deemed control blocks), so that any resulting Tax Court decision likely would be of current interest.

Neal Armstrong.  Summaries of Deans Knight Circular for winding-up distribution under Spin-Offs & Distributions – Liquidations and of Arrangement Circular of Forbes Medi-Tech Inc. and Prospectus of Deans Knight under Other – Loss Utilization.