Deans Knight -- summary under Corporate Liquidations

Summary Under
Tax Topics - Public Transactions - Spin-Offs & Distributions - Liquidations - Corporate Liquidations
Deans Knight stated capital distribution of funds net of holdback to pay and fight loss-denial reassessment

For a summary of the 2009 transactions challenged by CRA, see under Other – Loss Utilizations.

Overview

The Corporation, which had accumulated investment tax credits of $7M, non-capital losses of $19.4M and undeducted SR&ED expenditures of $34.4 as a life sciences company, disposed of the assets of that business in a 2008-2009 reorganization which was intended to avoid an acquisition of control of the Corporation, and then issued $100M of shares in an April 2009 IPO, so that it now was mostly owned by the new investors. The shares were required to be redeemed by the Corporation after five years (i.e., in April 2014). The proceeds were used to acquire a portfolio of high-yield corporate bonds. CRA is now proposing to reassess the Corporation $22.7M by denying use of the pre-2009 tax attributes. The Corporation will distribute most of its assets as a stated capital distribution of cash, net of a holdback to deal with the tax dispute.

Proposed reassessment

On 21 January 2014 the Corporation received a proposal letter from CRA:

In the Proposal Letter, the CRA stated that it intends to reassess the Corporation and deny the deduction of certain non-capital losses and other tax attributes in the Corporation's taxation years ending in 2009 to and including 2012… .[CRA] intends to deny the use of certain tax attributes by the Corporation on the basis that an acquisition of control of the Corporation occurred and on the basis of the General Anti -Avoidance Rule… . The Corporation, in consultation with its legal advisors, remains of the view that its tax filing position is appropriate… . The Corporation estimates the potential tax liability to be approximately $21.7 million… .

Distribution

Out of its assets of approximately $130M, the Corporation is planning to hold back $22.7M to satisfy the expected reassessment, a further $1.2M to pursue a tax appeal and to keep the Corporation going for up to four years, and to distribute all but $4M (in respect of remaining securities) of the remainder as a distribution of capital to its shareholders. The Corporation will then no longer satisfy the TSX listing requirements and will voluntarily delist.

Canadian tax consequences of distribution

The Corporation expects that the distribution will not give rise to a deemed dividend under the "Winding-Up Exception" in s. 84(2).