19 January 2011 Internal T.I. 2010-0358751I7 - Property Disposed on Business Discontinuance

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: Whether s. 160.4(1) ITA has a similar application to s. 171(3) ETA.

Position: No; but where s. 160 does not apply directly against a shareholder, s. 15(1) or 84(2), combined with s. 160, could be a viable alternative.

Reasons: S. 160.4(1) of the ITA applies where an insolvent corporation has restructured, while s. 171(3) of the ETA applies where a registrant has ceased commercial activity. Appropriation of property under the ITA is dealt with under s. 15(1) and 84(2).

January 19, 2011

	London Tax Services Office				HEADQUARTERS
	Tax Services and  					Income Tax Rulings
	   Debt Management Division	  				Directorate
									Lindsay Frank
	Attention: Todd Jaffray, Manager			(613) 948-2227

Tax Accounts Receivable

									2010-035875

Disposition of Property on Discontinuance of Corporation

This is in reply to an email from Tracy Cope. At issue is whether subsection 160.4(1) of the Income Tax Act ("ITA") provides a remedy that is similar to subsection 171(3) of the Excise Tax Act ("ETA") when a corporation has discontinued operations.

The ETA provides that on the discontinuance of a business, the registrant is required to pay GST on the disposition of its commercial property. Ms Cope is looking for a parallel remedy under the ITA that would enable her to collect an amount owing by a corporation that has reportedly discontinued operations. In her case, a corporation filed a return declaring tax payable and reported assets on that date; however, it has since ceased to operate, and there are no assets remaining.

Subsection 171(3) of the ETA deals with the treatment of property once used in a commercial activity when a person ceases to be a registrant. As that property has now been put to non-commercial use, subsection 171(3) deems the person to have disposed of the property at its fair market value immediately before the business was deregistered. Consequently, the person is required to pay the GST on that deemed disposition.

In this regard, it should be noted that subsection 171(3) of the ETA and subsection 160.4(1) of the ITA are not alike. The former applies to an entity that is no longer registered for GST purposes, while the latter applies to a corporation that has undergone restructuring. Subsection 160.4(1) would not assist Ms Cope in the instant case.

Seven possible outcomes are envisaged regarding the disposition of the company's assets. The landlord could have seized the premises and thrown out the assets. Second, the landlord could have seized and re-rented the premises with the assets attached. Third, a secured creditor could have realised on the assets. Fourth, someone other than the company (for example, the employees) could have taken the assets. Fifth, the company could have sold the assets and paid the shareholders a cash dividend out of the proceeds arising from the sale. Sixth, the shareholders could have appropriated the assets. Seventh, the company could have given the assets to the shareholders. The last three outcomes are germane to this discussion.

A cash dividend paid by the company could constitute a transfer of property under section 160 of the ITA, see Algoa Trust v. The Queen, [1993] 1 C.T.C. 2294 (T.C.C.). However, section 160 would not apply if the shareholders dealt at arm's length with the company, see Gestion Yvan Drouin Inc. v. The Queen, [2001] 2 C.T.C. 2315 (T.C.C.).

Alternatively, if the company's assets were distributed or otherwise appropriated to or for the benefit of the shareholders on the discontinuance of the business, subsection 84(2) deems the corporation to have paid a dividend to the shareholders. If there is no true discontinuance, subsection 15(1) may apply instead of the appropriation remedy under subsection 84(2), see Felray Inc. v. The Queen, [1998] 2 C.T.C. 4 (F.C.T.D.).

It should be noted that an assessment under either subsection 84(2) or 15(1) could, in addition to creating a tax owing by the shareholder on that income, also give rise to an assessment against the shareholder under section 160 for tax owing by the corporation. Section 160 is engaged where a shareholder is deemed to have received a dividend under subsection 84(2), or where a benefit is conferred on the shareholder under subsection 15(1), see Bleau v. The Queen, 2008 D.T.C. 6516 (F.C.A.). This combined effect could facilitate collection of the corporate debt from the shareholder. Keep in mind, however, that an assessment under either subsection 15(1) or 84(2) would require the involvement of Audit.

An assessment under section 160 may be raised at any time. However, an assessment under either subsection 84(2) or 15(1) would be subject to the limitation provisions in section 152. Under subsection 152(4), the Minister may at any time assess, reassess, or make an additional assessment of tax, interest, or penalties. Nevertheless, unless paragraph 152(4)(a) to (d) applies, the Minister cannot assess beyond the normal reassessment period. Paragraph 152(3.1)(b) defines the normal reassessment period of an individual as the period that ends within 3 years after the earlier of the mailing of a notice of an original assessment. Accordingly, the shareholder's filing history would need to be analysed to determine whether an assessment under either subsection 15(1) or 84(2) would be statute-barred.

Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate

c.c. Patricia Taylor / Manager
General Operations Section
General Operations and Border Issues Division
GST Rulings Directorate

Tracy Cope
Revenue Collections Section
London Tax Services Office