25 November 2021 CTF Roundtable Q. 6, 2021-0912011C6 - Application of section 143.4

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.

Principal Issues: When does the “right to reduce” arise for purposes of section 143.4 of the Act when interest is forgiven under a plan of arrangement from proceedings under the Companies’ Creditors Arrangement Act?

Position: See comments.

Reasons: This is a question of mixed fact and law that depends on the circumstances of each case.

2021 CTF Annual Conference

CRA Roundtable

Question 6: Subsection 143.4(1) and the “right to reduce”

In CRA Document No. 2016-0628741I7, the CRA appears to have taken the position that where, in a particular year, a debtor and its creditors enter into a plan of arrangement pursuant to which interest will be forgiven and the plan is not implemented until a subsequent year, subsection 143.4 would apply in the year the plan was approved by the creditors. We say “appears” because certain specifics have been redacted. The CRA stated:

A “right to reduce” is defined in subsection 143.4(1) as follows: “right to reduce” means a right to reduce or eliminate an amount in respect of an expenditure at any time, including, for greater certainty, a right to reduce that is contingent upon the occurrence of an event, or in any other way contingent, if it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable.

Notwithstanding that the Taxpayer’s right to reduce the Interest Debt is contingent upon a series of conditions that are set out in the Plan, including the Conditions Precedent, it may still fall under the definition of a “right to reduce” in subsection 143.4(1) “if it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable.” Since there is no definition in the Act of the term “exercisable,” we refer to the ordinary meaning of this term. According to Merriam-Webster’s online dictionary, the verb to “exercise” includes the following meanings:

1 a: to make effective in action: use

b: to bring to bear: exert

c: to implement the terms of (as an option)

Also, according to this online dictionary, the suffix “able” means0:

• : fit for or worthy of being

• : likely to or capable of

• : having a certain quality

Based on the foregoing definitions, a right that is “exercisable” may be interpreted as a right that is “capable of being made effective in action,” “capable of being brought to bear” or “capable of being implemented.” Thus, a right may be considered a “right to reduce,” if it is reasonable to conclude, having regard to all the circumstances, that the right will become “capable of being made effective in action” or “capable of being implemented.”

[…]

It is our view, based on the information provided, that the Taxpayer’s right to reduce the Interest Debt is contingent upon a series of conditions that are set out in the Plan, including the Conditions Precedent, and that it falls within the definition of a “right to reduce” in subsection 143.4(1) because it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable. Thus, subsection 143.4(4) would apply in XXXXXXXXXX and this will result in an income inclusion for that year pursuant to paragraph 12(1)(x). Any income inclusion pursuant to paragraph 12(1)(x) should be offset by losses generated by the unclaimed interest expense relating to the XXXXXXXXXX to XXXXXXXXXX taxation years.

Assume that CCAA procedures commence in a particular year (Year 1), creditors approve the plan the following year (Year 2) and the plan is implemented in a subsequent year (Year 3). At what stage of the process will a “right to reduce” arise for purposes of section 143.4? We suggest that prior to the plan being (at the very least) approved by the creditors, it would not be reasonable to conclude, having regard to all the circumstances, that any right to reduce an amount would become exercisable, but seek CRA’s confirmation given the broad and somewhat vague wording of the definition.

CRA Response

You have asked us to consider when the “right to reduce” arises for purposes of section 143.4 of the Act when interest is forgiven under a plan of arrangement from proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”).

Under subsection 143.4(1) of the Act, a “right to reduce” an amount in respect of an expenditure includes, for greater certainty, a right to reduce that is contingent upon the occurrence of an event, or any other way contingent, if it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable.

In general, when a right to reduce arises under subsection 143.4(1) of the Act will require a determination of when the legal right, albeit contingent, arises and whether it is reasonable to conclude that the right will be exercisable. This determination will depend on a review of all of the facts and circumstances. In the case of interest that is forgiven under a CCAA proceeding, this will include a review of the plan of arrangement and terms of the contingencies contained therein and an assessment of whether that right of a debtor to pay interest for less than the full amount to settle the obligation will be exercisable in the circumstances. In our view, this review and assessment should be done in the context of a ruling request when all of the circumstances surrounding the CCAA proceeding are available.

We are prepared to consider this issue in the context of a request for an advance income tax ruling as described in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

Yaroslavna Serdyukova
2021-091201
November 25, 2021