News of Note

It may be desirable for a company that is going through a CCAA restructuring to reduce its non-capital losses (for example, by reversing previous CCA claims) given that it may be better to instead realize income under s. 80(13) (reflecting only half of the unapplied forgiven amounts arising on the CCAA implementation), keeping in mind that with other planning there may be substantial pools to shelter that income, and it can be recognized (under s. 61.4) over five years.

Embedded capital losses in the shares of subsidiaries might be triggered in the year preceding the year of debt settlement so that they would become net capital losses, thereby soaking up the forgiven amount (after first being applied to non-capital losses) before the use of more valuable attributes such as UCC.

It may also be desirable to wind-up a wholly-owned subsidiary under s. 88(1.1) shortly before the CCAA implementation, given that the non-capital losses will be protected from a s. 80(3) grind as they would not be considered NOLs of the parent until after the compromise.

An alluring proposition, if valid, is that contractual claims, whose amount was fully deducted when incurred, will not give rise to a forgiven amount (or other inclusion) when forgiven.

Neal Armstrong. Summaries of Marie-Andrée Beaudry and Dean Kraus, "Selected Income Tax Considerations in the Court-Approved Debt Restructurings and Liquidations," Draft 2015 Annual CTF Conference paper under s. 80(13), s. 80(4), s. 80(3), s. 20(1)(c), s. 80(1) - commercial debt obligation, s. 18(1)(e), s. 224.1, s. 222(2), s. 80(2)(h).

Former Chief Justice Bowman thinks that “a ‘bare trustee’ is an agent, not a trustee,” and that “no one can legally be a trustee and an agent at the same time,” so that the statement adopted in Trident Holdings that “a person may be both agent of and trustee for another,” was incorrect (although the same passage went on to acknowledge that in a bare trust “it is the agency relation that predominates.”) Accordingly, “judges, when faced with something called a ‘bare trustee’, have to make up their minds and decide which side of the line the entity falls on” and can’t say "maybe both".

Neal Armstrong. Summary of Donald G.H. Bowman, “Bare Trusts and Nominee Corporations,” Tax Topics (Wolters Kluwer), August 11, 2016, No. 2313, p. 1 under s. 104(1).

CRA considers that a s. 162(7) penalty for failure to file a T1135 form can be assessed beyond the normal reassessment period (or, under s. 152(4)(b.2), beyond the normal reassessment period plus three years where the taxpayer did not report income from specified foreign property in the relevant return) but, in such a case, CRA would have to “prove” that “although that error may have been made in good faith, it was an error that a prudent and conscientious person would not have made.”

Neal Armstrong. Summary of 26 May 2016 Alberta CPA Roundtable, 2016-0645001C6 under s. 152(4)(a)(i).

When Foreign Pubco is planning to spin off some of its assets in the form of Foreign Spinco, there will be various points to consider respecting a potential preceding butterfly transfer of the Canadian spin-off assets by a Canadian subsidiary (DC) to a transferee corporation subsidiary of Foreign Spinco (TC), including:

1. Other "spin" assets would need to be contributed to Foreign Spinco before the butterfly of the Canadian "spin" business assets, in order to ensure that the Foreign Spinco shares never derived 10% or more of their FMV from the TC shares.
2. Given the relatively narrow meaning accorded to "reorganization" by CRA, in the context of a cross-border butterfly, one need only ensure that the series of transactions or events does not include prohibited transactions or events described in 55(3.1)(a) or 55(3.1)(b), “and the continuity of interests rules in paragraphs 55(3.1)(c) and (d) should be largely irrelevant.”
3. A "reverse" foreign spin-off, where the "keep" assets are butterflied to TC as part of the usual three-party share exchange and the Foreign Spinco that is distributed to the Foreign Pubco shareholders is the existing shareholder of DC, likely will not work – unless, for example, Foreign Spinco held the DC shares through a single purpose foreign holding company.
4. The standard three-party exchange mechanics do not accommodate the foreign shareholder transferring the DC shares on a s. 85 rollover basis, so that it is problematic if the DC shares are taxable Canadian property with an accrued gain.
5. Although CRA does not believe that a transaction can qualify as a "permitted exchange" if preferred shareholders of DC do not participate in the butterfly, it nonetheless may be that the FMV of the Foreign Spinco shares should be conisdered to "approximate" the amount determined under the "permitted exchange" formula where this difficulty arises.
6. A one-way cash adjustment mechanism was accepted in 2014-0530961R3 and 2013-0491651R3.
7. Although, under GAAP, a pro rata portion of DC’s retained earnings likely will be transferred onto the balance sheet of TC, this cannot occur as of the very beginning of TC’s taxation year, so that TC for its first year cannot “use” its retained earnings for thin cap purposes. Accordingly, TC might determine to have a year-end immediately after the butterfly.

Neal Armstrong. Summaries of Christian Desjardins and Nik Diksic, "Cross-Border Butterflies in the Context of Public Spin-Off Transactions", Draft 2015 CTF Annual Conference paper under s. 55(3.1)(b) and s. 55(1) – distribution.