Lecavalier – Tax Court of Canada finds that GAAR applied to a debt conversion using cash-circling, as an abusive avoidance of the debt forgiveness rules

In an arm’s length sale of a Canadian subsidiary (Greenleaf) of Ford U.S. to a Canadian purchaser for a purchase price ($10M) which thus was less than the $25M debt owing by Greenleaf to Ford U.S., $15M of the debt was first converted into common shares through a cash subscription by Ford U.S. for Greenleaf common shares, and a debt repayment – so that the debt-parking rules did not apply on the subsequent sale of the debt and shares of Greenleaf.

The general anti-avoidance rule applied to include debt forgiveness income in the hands of Greenleaf.  The conversion of the debt to shares through a circling of cash rather than a direct conversion represented an abusive circumvention of s. 80(2)(g);  and it did not matter that this was implemented by Ford U.S. rather than the purchaser.

A subtlety not captured in the above round numbers is that the confirmed GAAR assessment treated the debt forgiveness as the amount of the debt repayment, which was $100,000 higher than the cash subscription amount due to the application of excess Greenleaf cash.  Implicitly applying GAAR on the basis that it was abusive to use cash already on hand to pay down debt, thereby potentially reducing any impact of the debt-parking rules, was inconsistent with the reasons of Bédard J.

Neal Armstrong.  Summaries of Pièces Automobiles Lecavalier Inc. v. The Queen, 2013 TCC 310 under ss. 245(4), 248(10), 245(3) and General Concepts – Evidence.