18 May 1990 Administrative Letter 74726 F - Distribution of Proceeds of Realization to Secured Creditor

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.

SUBJECT:  24(1) Application of subsections 159(2) and (3) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your memorandum of February 15, 1990 concerning the application of subsection of subsections 159(2) and (3) in respect of certain transactions of the 24(1)  The facts as we understand them are as follows:

Facts

24(1)

Your Views

In your view, 24(1) You have also requested our comments on Mr. Hoard's memorandum dated January 19, 1990, addressed to you, which concerned the tax consequences of the transactions described in 4 above.

You have not raised nor have we dealt with the tax consequences to 24(1) of an Opco.

Our Views

24(1) The Department's administrative position, however, is that where a responsible representative (as described in subsection 159(2)) turns over the proceeds of realization to a secure creditor subject to a valid security instrument such a payment is not considered to be a distribution for the purposes of subsection 159(2). The preceding position is outlined at paragraph 2261.13(3)(A) in chapter 2260 of the Tax Operations Manual ("TOM"). This chapter is entitled "Acts Affecting Collections". Paragraph 2261.13(3)(d) states that the sale or other disposal of a specific property to satisfy a debt secured by that property is also not considered a distribution.

21(1)(b) We have confirmed with B. Skulski, Chief of Technical Enquiries Section, Head Office Collections and Accounting Directorate that these TOM instructions have not been withdrawn. Therefore we would have no objection if you were to advise  24(1) on the basis of these TOM instructions.

If the facts establish that  24(1)  has operated in one of the capacities referred to in subsection 150(3) with respect to the affairs of a particular Opco, 24(1) would be required by subsection 150(3) to file a return of Opco's income for the year, if Opco had not done so in accordance with the requirements of section 150 of the Act.  24(1) would then become liable for tax owing by Opco to the extent provided  by subsection of the Act.

21(1)(a)

Mr. Hoard has queried the meaning of "net proceeds of realization" of property securing  24(1)  claims as used in  24(1)  letter of January 5, 1990. The net proceeds of realization would probably be determined by reference to the applicable provincial Personal Property Security Act. Given the fact that the TOM instruction sanctions a liquidator turning over the proceeds of realization of property to the secured creditor, it is reasonable to conclude that turning over something less than the gross proceeds of realization would also be acceptable. Therefore it is probably unnecessary to pursue the meaning of "net proceeds of realization".

J.C. ClarkChiefLeasing & Financing SectionFinancial Industries DivisionRulings Directorate