Requirement to use related person’s tax attributes on s. 80.04 designation (p. 13:9)
Further considerations arise when a debtor seeks to make a designation of the forgiven amount in respect of the shares or debts of the related corporation or interests in related partnerships (i.e. the third category of capital property referenced above [in s.80(11)]. In fact, such a designation would not reduce the amount included in the debtor's income under subsection 80(13) by the amount designated in respect of that third category of capital property to the extent that certain related parties of the debtor have "gross tax attributes" and an amount of "residual balance" exists. An amount of "residual balance" generally exists if the gross tax attributes of related entities exceed the debtor's unapplied forgiven amount.
Conversion of non-capital losses (“NOLs”) to other attributes (p. 13:10-13:11)
A common planning theme in a restructuring context is to seek to maximize the tax attributes of the debtor following restructuring by effectively converting NOLs into other tax attributes that will be available after debt settlement. In this respect, there is an inherent arbitrage potential in the application of the debt forgiveness regime because any forgiven amount will mandatorily reduce NOLs on a dollar-for-dollar basis, while any remaining forgiven amount, after mandatory and elective applications of the forgiven amount to the tax attributes of the debtor, will only result in a one-half inclusion of the remaining forgiven amount in the debtor's income. ...
[W]ays that NOLs can effectively be converted into other tax attributes….[include] amend[ing] tax returns for taxation years ending prior to the taxation year in which the settlement of the debt occurs in order to reduce discretionary deductions (for example, capital cost allowance [CCA] or deductions in respect of CEC) and thereby reduce NOLs, with the result that the debtor could have increased deductible pools after emerging from the restructuring process. Similarly, not claiming certain reserves (for example, under paragraph 20(1)(m)) in the year preceding settlement may also reduce NOLs and potentially provide a benefit to the debtor. Another planning avenue to consider in order to accelerate income and thereby reduce NOLs includes the debtor effecting an internal taxable transfer of assets in the year preceding settlement. …
[C]areful tax modeling will be required to ensure that no material cash taxes will arise in the year of the restructuring as a result of the income inclusion under subsection 80(13), taking into account the potential five-year inclusion under section 61.4… .
Debt slides (p. 13:11)
[O]ther planning avenues…include (i) a so-called tuck-under transaction to eliminate underwater debt owed between corporations in the same corporate group... . [fn 42: See…Advanced Tax Ruling 66…and…2004-0081691R3.]
Changes that reduce debt FMV (p. 13:7)
[C]hanges to certain terms of a debt, such as interest rates and payment schedules, should not lead to a forgiven amount in and of themselves, provided that the principal amount of the debt is not altered, even though such changes may reduce the market value of the debt….
Generation of net capital losses (NCLs) to absorb forgiven amount (p. 13:11)
Another common tax planning theme…is to trigger any embedded capital losses on the shares of related subsidiaries held by the debtor in the year preceding the year of debt settlement so that those embedded capital losses will become NCLs and any forgiven amount will be mandatorily applied to those NCLs (after NOLs are fully reduced). Because of the issues that arise with respect to designating an unapplied forgiven amount to be applied to reduce the ACB of the shares of related subsidiaries (discussed above), the realization of embedded losses in those shares can effectively allow the debtor to apply a forgiven amount to the embedded loss in those shares without having to first make mandatory designations to reduce other valuable tax attributes or enter into a section 80.04 agreement with the subsidiary. Such an agreement would expose the tax attributes of the related subsidiary to the application of the debt-forgiveness rules. ...
Wind-up of subsidiary (Subco) immediately before CCAA compromise to insulate its non-capital losses (“NOLs”) from s. 80 (p. 13:16)
The winding up of Subco into Pubco also results in Subco's ... NOLs flowing up to Pubco pursuant to subsection 88(1.1). However, these NOLs are only available to be utilized by Pubco beginning in respect of its next year that commences after the year in which the windup of Subco occurs. Importantly, these NOLs should not be considered NOLs of Pubco for the year of Pubco ending before compromise, and therefore they should not be reduced by any forgiven amount of Pubco that arises in the year of Pubco in which the debt settlement occurs. ....
Non-deductibility of post-CCAA-stay interest (p. 13:29)
[C]reditors are only prevented under the CCAA stay from enforcing the debtor company's obligations. If a plan is not successful, the creditors can enforce payment and the debtor is required to pay all interest, including the interest that accrued following the initial order. …
Regardless, the outcome in Nortel finally confirms that interest should no longer be deductible under paragraph 20(1)(c) unless otherwise provided for in the plan.
CCAA Stay does not generate a s. 18(1)(e) contingency (p. 13:32)
[W]hile a stay under the CCAA stays proceedings with respect to damage claims, such a stay does not, in and of itself, render any liability for such damages contingent for the purposes of paragraph 18(l)(e). The existence of a stay impedes the ability of a creditor to enforce contractual remedies, but it does not mean that a contractual liability has not come into existence.
Whether forgiven amount arises on settlement of contractual claims (pp. 13:34-13:35)
In addition to the issue of deductibility of claims for contractual damages, consideration must also be given to whether the settlement of any such claims under a restructuring for less than the amount of the liability may result in the application of the debt forgiveness rules. ...
Subsection 248(26) provides, inter alia, that for the purpose of applying the provision of the ITA relating to the treatment of the debtor in repect of the liability, any amount that a debtor becomes liable to pay that is otherwise deductible in computing the debtor's income will be considered to be an obligation issued by the debtor having a principal amount equal to the amount of the liability. …
[T]o conclude that any such obligation constitutes a commercial debt obligation, one must conclude that interest would be deductible if it were payable on the obligation. It may be difficult to conclude that any such interest owing in respect of the claim for damages would be deductible under paragraph 20(1 )(c), since it is difficult to say that any such liability for contractual claims qualifies either as "borrowed money" or has been incurred for the acquisition of a "property". Although an argument could be made, depending on the precise facts, that any such interest may be deductible under section 9,…if a taxpayer is seeking to deduct any claims for damages, the CRA will likely argue strenuously that if the deduction of those claims is allowed, then their settlement should also be subject to the application of the debt forgiveness rules. …
Limitations on CRA compensation (set-off) rights (p. 13:36)
While Revenu Québec followed the decision in DIMS Construction [fn 111: …2005 SCC 52] with regards to formal bankruptcies, until quite recently it continued to apply the compensation mechanism to use post-insolvency refunds owed to the tax debtor to reduce pre-insolvency debts when the debtor was the subject of an approved proposal under the BIA. The justification provided by the tax authorities for this distinction between a bankruptcy and a proposal was that the estate of the debtor company is not vested in the trustee for a proposal as it is for formal bankruptcy. Debtors claiming harm from this continued practice filed a class action lawsuit against Revenu Québec. [fn 112: Brisbois c. Agence du Revenu du Québec, 2014 QCCS 83.] Revenu Québec entered into a settlement agreement on June 19, 2014 accepting the principles of DIMS. Construction that pre-filing debts should not be offset by post-filing refunds.
More recently, in its decision Métaux Kitco, the Quebec Superior Court saw no reason to differentiate between the context of a formal bankruptcy and that of an arrangement under CCAA, extending the applicability of the DIMS Construction decision to CCAA. ...
Stay of assessment in CCAA proceedings (p. 13:38)
In…Girard, the Québec Court of Appeal concluded that a notice of assessment or reassessment constituted a proceeding and was therefore subject to the stay of proceedings under the BIA. The court determined that a notice of assessment or reassessment issued while the stay is in effect will not have the legal effect conferred on it under the ITA unless the tax authorities obtain the leave of the court under section 69.4 of the BIA. [fn 132: …2014 QCCA 1922] …While in Girard the stay of proceedings was issued under section 69.3 of the BIA, the language in that provision is quite similar to the stay provision in section 11.02 of the CCAA. ...