Avoidance of s. 111(12) where simultaneous acquisition of control (AoC) and amalgamation (p. 3)
[2014-05544941E5] found that both the AoC and Amalgamation were considered to occur at the same time, [fn 8: This would result in only one taxation year-end for ACo and BCo, given that no other transactions occurred on that day other than transactions in the ordinary course of business.] being the earliest moment on the particular day. Because subsection 80.01(3) deemed the Debt to have been settled two moments before the time of the AoC/Amalgamation, the Debt was not considered to be outstanding one moment before the AoC, and therefore subsection 111(12) and paragraph 111(4)(c) were inapplicable.
Unmatched application of ss. 111(12) and 40(11) where amalgamation follows AoC (pp. 3-4)
[I]f the Amalgamation had occurred the day after the AoC, subsection 111(12) would have applied…[and] as a result, ACo would have realized a capital loss (equal to the FX loss in the Debt) under paragraph 111(4)(d) in its taxation year ending immediately before the AoC. …
Finance should consider amending the Act to permit the subsection 111(12) loss to be carried forward after the AoC to offset a later related subsection 40(11) gain.
Unmatched applications of ss. 111(12) and 40(11) where AoC before debt settlement (pp. 4-5)
[A]ssume that XCo owes US$1OO million to a third party creditor. This debt was issued when the Canadian dollar was at par, and now US$1.00 = CDN$1.30. This debt is to be settled and extinguished on the payment of US$20 million as part of a debt restructuring which includes an AoC of XCo. On a net basis, XCo is economically advantaged by CDN$74 million — it borrowed the equivalent of CDN$100 million and is only required to repay the equivalent of CDN$26 million. Its net tax result should reflect this CDN$74 million "economic gain".
If the AoC occurs first, XCo will realize a capital loss equal to CDN$30 million under subsections 111(12) and 111(4).
On the subsequent settlement of the debt for US$20 million, XCo will realize a debt forgiveness equal to CDN$80 million. [fn 12: The forgiven amount is based on the currency exchange rate at issuance, pursuant to paragraph 80(2)(k).] If XCo has at least CDN$80 million of non-capital losses, the debt forgiveness will be fully offset by these losses. XCo's FX gain or loss on the actual settlement of the debt will be determined under subsection 40(11) to be a gain of CDN$24 million (being the net of an FX loss of CDN$6 million on the US$20 million repaid, and a reversal of the CDN$30 million subsection 111(12) loss). This gain will not be able to be offset by any existing losses of XCo (including the subsection 111(12) loss), as it is realized after the AoC. However, if the debt settlement were to occur prior to the AoC, XCo would realize a forgiven amount of CDN$80 million and an FX loss of CDN$6 million; this is the same net economic result (reflecting the CDN$74 million "economic gain") but it would not result in an unsheltered capital gain.
If a restructuring of USD debt (with an accrued FX loss) of a Canadian debtor entails an acquisition of control of the debtor before the debt is settled for a payment of, say, 20% of the USD amount owing, then an unsheltered capital gain under s. 40(11) very well may arise. In concept, on the debt settlement, s. 40(11) will deem the debtor to realize a capital gain to match the FX capital loss previously realized on the USD debt under s. 111(12) on the AoC (except that this capital gain will be reduce somewhat by the3 FX loss actually realized on the 20% repayment). However, the s. 111(12) loss would not be available to be carried forward to offset the s. 30(11) gain.
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