7 December 1999 External T.I. 1999-0006715 - Right to object and appeal

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. What is CCRA's position with respect to shareholder's rights to file a Notice of Objection and Appeal of an assessment issued to a corporation that is liquidating or has been dissolved.

2. Does paragraph 42 of IC-81-11R3, which states that the Department will deny transfers of refunds to third parties, still apply after the introduction of ss 220(6).

Position:

1 General information provided on rights of shareholders per CBCA.

2. Yes

Reasons:

1. N/A.

2. CCRA will only issue cheques to the corporation to which the amount is due, not to an assignee. Under ss. 220(7) CCRA is not bound by any assignment arrangements between taxpayers.

December 7, 1999

Part XVI. Rights to Object and Appeal Following the Liquidation and Dissolution of a Corporation.

Question 1

1. What is Revenue Canada's position in respect of the shareholder's rights to file a Notice of Objection, and have a right to appeal an assessment made by the Minister in the following situations:

(a): Where the corporation has been liquidated but the corporation has not yet been dissolved.

(b): Situations where the corporation has been dissolved.

(c): Will the answer to (a) or (b) change depending on the statute under which the liquidated corporation is originally incorporated?

(d): Will the answer to (a) or (b) change if Notice of Objection and Appeal is filed before the corporation is liquidated or dissolved but the issue is resolved subsequent to the liquidation or dissolution?

Answer:

General comment:

If a corporation chooses to object to an assessment, a Notice of Objection must be filed by a person authorized by the corporation, usually an officer or member of the Board of Directors, (who may also be shareholders). There is no provision in the Act for shareholders, acting only in their capacity as shareholders, to initiate a Notice Of Objection, or initiate an appeal, in respect of an assessment issued to the corporation of which they are shareholders, unless authorized to do so by the corporation. This is the case whether the corporation is a going concern, or in the stages of winding up. The introduction of subsections 220(6) and (7) of the Act did not affect the objection or appeal process.

In a voluntary dissolution of a corporation, shareholders' rights are described in the relevant statute of the jurisdiction in which the corporation was created. A corporation incorporated under the Canada Business Corporations Act (CBCA), provides shareholders with certain rights in Part XVIII, Liquidation and Dissolution. The CBCA states that the shareholders must approve, by vote, a special resolution to dissolve the corporation. Shareholders not otherwise entitled to vote, are entitled to vote on the dissolution.

Under the CBCA, any interested person can apply to a court to have the liquidation supervised by the court. An interested person can also apply to the court to have the corporation revived as a corporation under the CBCA. In situations where a dissolution is initiated by a director or a shareholder, any interested person can apply to prevent the corporation from being liquidated or dissolved.

Dissolutions of insolvent or bankrupt corporations are also subject to the Bankruptcy and Insolvency Act.

Question 1(a) Where a corporation has commenced wind-up procedures and is in the process of liquidation, but has not yet been dissolved, the CCRA may issue an assessment or reassessment to the corporation. As stated above, in a dissolution situation, shareholders' rights governing their dealings with the corporation vary between jurisdictions and are limited to those rights provided to them under the corporate law of the jurisdiction in which the company was incorporated. However, the statutes only govern the rights of the shareholders in their relationship with the corporation, not the CCRA.

Question 1(b): Once the dissolution is complete, a certificate of dissolution is issued and the corporation's existence comes to an end. Under section 226 of the CBCA, a civil, criminal, or administrative action or proceeding may be brought against the dissolved corporation within two years after its dissolution as if the corporation had not been dissolved. However, the period of time during which actions can be brought against a corporation differs between jurisdictions and the statute under which a company was incorporated should be consulted.

Two recent court cases, 460354 Ontario Inc. (92 DTC 6534) and Hadi Saraf in his Capacity as a Director of 495187 Ontario Limited at the time of its dissolution (94 DTC 6229), both of which involve corporations incorporated under the Ontario Business Corporations Act, held that an assessment is an administrative action and therefore a dissolved corporation may be assessed or reassessed, provided the relevant time limit has not expired. This assessment would be under section 152 of the Income Tax Act and would be served in the name of the dissolved corporation on the last known director or other officer of the corporation.

A clearance certificate, which allows the legal representative of the corporation to distribute property, will only be issued to a corporation when:

(a) you have filed and we have assessed the required income tax returns; and

(b) all amounts for which the corporation is liable have been received or secured. These amount include income tax (including the provincial and territorial tax that we administer), Canada Pension Plan contributions, Employment Insurance premiums, interest, and penalties.

Where a liquidator has distributed corporate assets without obtaining a clearance certificate pursuant to subsection 159(2) of the Act, the liquidator is liable for unpaid taxes, interest and penalties of the corporation, pursuant to subsection 159(3) of the Act.

Question 1(c): The statute of the jurisdiction under which a company was incorporated should be referred to, to determine the rights of shareholders in their dealings with the corporation, in a liquidation or dissolution situation. For example, voting rights and the period in which actions, including assessments, can be brought against the company may differ between jurisdictions. However, with respect to CCRA's actions, provided the relevant time limit has not expired, the general comments made earlier apply, regardless of the jurisdiction of incorporation.

Where a corporation has been granted articles of continuance in another jurisdiction, subsection 250(5.1) of the Act states that for purposes of the Act (other than subsection 250(4) regarding residency), at any time after the continuance, the continued corporation is deemed to have been incorporated in the particular jurisdiction and not to have been incorporated in any other jurisdiction. Therefore, for tax purposes, in a liquidation or dissolution situation, the corporation will be treated as having been incorporated in the jurisdiction into which it has continued.

To determine whether shareholders have a voice in the decision to change jurisdictions, and to determine the impact on shareholders' rights on a continuation, the concern likely being the loss or dilution of rights that existed in the former jurisdiction, the statutes of the jurisdictions involved would have to be examined.

Question 1(d): As stated above, a clearance certificate will only be issued to a corporation when you have filed, and we have assessed, the required income tax returns, and all amounts for which the corporation is liable have been received or secured. In the circumstance you describe, paragraph 226(2)(a) of the CBCA provides for the continuance of actions commenced by or against the body corporate before its dissolution. A shareholder who is an interested person, has the right under section 226 of the CBCA to initiate a claim against the dissolved corporation. Where the corporation is governed by another corporate statute, that statute should be examined for the applicable time frames.

Question 2:

Paragraph 42(b) of Information Circular IC 81-11R3 (March 26, 1993) addresses transfers of overpayments and states that "requests for transfers of a refund to a third party are prohibited by section 67 of the FAA (Financial Administration Act). The Department will therefore deny such requests." In view of the introduction of subsection 220(6) in 1996, has Revenue Canada modified the position stated in the Information Circular?

Answer:

The Canada Customs and Revenue Agency's position is that we will not make any corporate refund cheques payable to an assignee, including other federal departments and crown corporations. We will only make cheques payable to the claimant corporation.

In the past, corporations would assign expected refunds of SR & ED investment tax credits or Film Tax Credits as security for bridge financing for their operations. However, as a result of the Marzetti case in 1994, it was found that, because of the application of section 67 of the Financial Administration Act, income tax refunds were not generally assignable. As a result, borrowers were not able to use expected refunds of investment tax credits as security for loans.

To overcome that impediment to financing, subsection 220(6) of the Income Tax Act was introduced to allow a corporation to assign any amount payable to it under the Act. Subsection 220(7) of the Act places certain limitations on the scope of the assignment and ensures that the assignment of an income tax refund does not in any way affect the right or obligations of the Crown.

The purpose of the legislation is to permit corporations to legally enter into assignments of amounts payable to them under the Act while maintaining the rights of the Agency. The Agency does not intend to become involved in commercial financial arrangements, and will not get involved in possible disputes which may arise between assignor and assignee. The Agency is not prepared to get involved in administering any assignment agreements. It is important to note that under subsection 220(7) of the Act, the CCRA is not obliged to accept an assignment nor does an assignment by a taxpayer create any liability to the CCRA. Subsection 220(7) of the Act was enacted to limit the scope of an assignment permitted under subsection 220(6) of the Act and maintain the status quo with respect to the Agency's involvement with the assignments. The Agency still has the right to set-off other liabilities of the assignor against a refund that becomes payable to the corporation.

However, taxpayers can make use of the C/O (care of) option to forward their refund cheques to a different address, such as the assignee. They can do this by attaching a letter to the T2 return or writing to the Corporation's services at their local tax centre. It should be made clear in the letter that the C/O address only applies for this refund cheque.

The comment in paragraph 42(b) of the Information Circular refers to a transfer to a third party. Based on the paragraphs preceding paragraph 42(b) in the Information Circular, permitted transfers took place by simply checking off the appropriate box on the T2 Return. Permitted transfers do not constitute an assignment arrangement, as referred to in subsection 220(6) of the Act. Therefore, in the context of the transfers described in the Information Circular, paragraph 42(b) still applies. The taxpayer would still have to use the C/O option described above to forward the cheque to a third party.

David Shugar
5-993027
November 24, 1999
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