8 January 1991 Income Tax Severed Letter 9134777 - Receiver and Control

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.

January 8, 1991

Ross Kaufman, Financial Institutions
Penticton District Office Division

N. Goldstein
(613) 957-3499

• 7- 913477

Receivers

What follows are the preliminary thoughts of the rulings officer with respect to the general fact pattern and should be treated as such. The purpose of this memorandum is to provide you with some views for consideration and, as such, the comments hereunder may not necessarily represent the views of the Department.

Facts:

• 1. Aco is in receivership and XXX is appointed receiver.
• 2. 24(11) incorporated Bco for the purpose of acquiring the assets of Aco which was followed by a sale of the shares of Bco to a third party purchaser.
• 3. XXX was a court appointed receiver.

Issues:

• 1. Is there an acquisition of control of Bco by the receiver?
• 2. Prior to the sale of the shares of Bco, would Aco and Bco be related?

Analysis:

A court appointed receiver is neither the agent of the debtor or the creditor but an officer of the court (Parsons v. Sovereign Bank of Canada, (1913) AC 160 (PC)). The appointment of a receiver does not divest the owner of his right of ownership in the assets (i.e. beneficial ownership) (In re Natural Gas Light & Appliance Co. (1918) 1 WWR 769); the appointment of a receiver has the effect of transferring possession of the debtor's assets to the receiver and permitting the receiver to deal with the assets.

Although the appointment of a receiver was initially an equitable remedy, the duties and powers, to some extent, have been codified. Subsection 101(b) of theCanada Business Corporations Actreads as follows: “A receiver or receiver-manager shall ...(b) take into his custody and control the property of the corporation in accordance with the court order or instrument under which he is appointed ...”. Notwithstanding that the receiver has possession and control of the assets, the legal and beneficial interest in, and of the assets remains in the debtor until the assets are sold or the receiver is discharged. Accordingly, any transfer of property during the currency of the receivership would be made in the name of the debtor (Sowman v. David Samuel Trust Ltd, (1978) All E.R. 616). Normally, any transfer would first require court approval and such transfer must be permitted within the terms of the court appointment of the receiver.

Once a receiver is appointed, the directors of the debtor cease to have any right to exercise the powers normally associated with the directors (see, 110). The receiver, in effect, controls all aspects of the day-to-day running of the corporation and the sale of the corporation's assets.

Although we are unaware of the precise facts in the situation under consideration, it would appear that the incorporation of Bco by the receiver would be done in the name of the debtor, or more probably, as a wholly owned subsidiary of Aco. The shares of Bco would be considered assets of Aco and, presumably, the receiver would be entitled to deal with those shares as assets of Aco. The shares could not be held in the name of the receiver as legal and beneficial ownership would still remain with the debtor and a receiver cannot acquire assets in its own name. The court is not an entity that can acquire shares. It is assumed that the shares were not issued in the name of the third party purchaser, otherwise the entire issue would be irrelevant.

The question that next arises is whether a receiver can be said to exercise control of Bco, as “control” is defined for purposes of theIncome Tax Actwhen the legal and beneficial ownership rests with the debtor. Pursuant to Interpretation Bulletin IT-64R2, paragraphs 13 to 16, the Minister has set forth its views on the meaning of control. Paragraph 13 reads as follows:

• 13. The word “control” is not defined in the Act, but the Courts have ruled that the word “controlled” contemplates the right of control that rests in ownership of such a number of shares as to give the majority of the voting power in the corporation. “Ownership” may be regarded as including the holding of shares by a trustee or executor as long as the voting rights are exercisable by the trustee or executor

It appears that the receiver may control the shares of Bco as its position is somewhat akin to that of a trustee. More significantly, paragraph 251(5)(b) of the Act reads, in part, as follows:

“(For the purposes of subsection 251(2)):

(b) a person who has a right under a contract, in equity or otherwise, . . .
• (i) to, or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation, shall, ... be deemed to have the same position in relation to the control of the corporation as if he owned the shares ...”

In Rostal Sales Agency Ltd. v. MNR, [1983] C.T.C. 5 (FCTD), the court considered the application of the predecessor to the current paragraph 251(2)(b) of the Act and determined that the application of paragraph 251(5)(b) of the Act was not limited where another group acquired voting rights other than by way of contract, but included a trustee created by trust.

Accordingly, it is possible that a respectable argument could be made that the receiver, being entitled to control the voting rights of the shares of Bco, would be deemed to control Bco by virtue of subparagraph 251(5)(b)(i) of the Act. This position, of course, depends on the terms of the appointment of the receiver, and any final determination should be based upon a review of the terms of the appointment and the precise powers of the receiver enumerated therein.

This view should be applied with caution for the following reasons:

• 1. This view must be confined to the facts; we would not go so far as to argue that the receiver controls Aco as the appointment of the receiver affects the rights of directors, not shareholders. The shareholders of Aco can elect the Board of Directors of Aco; however that Board of Directors would have no power, it being usurped by the receiver. However, with respect to Bco, we believe that the receiver would have the right, under its general right to manage the assets of Aco, to dictate how the shareholders of Bco must vote in respect of an election of the Board of Directors.
• 2. To some extent, we are influenced by an assumption that it is unlikely that one could argue that Aco controls Bco insofar as the practical effect of the appointment of the receiver is to suspend any rights of the directors to deal with the assets of Aco, including the shares of Bco.
• 3. Subsection 256(6) of the Act does not appear to be of any application in the present instance as the controller, being the receiver, is not controlling Bco for the purposes of safeguarding an interest or right of the receiver of any indebtedness owing to the controller.
• 4. While we are relying, to some degree, on principles of statutory interpretation to arrive at this conclusion; primarily with respect to what constitutes “control of the voting right” as set forth in subparagraph 256(5)(b)(i) of the Act, we doubt that the principles of statutory interpretation would extend the conclusion we have reached to having every corporation in which XXX in its capacity as receiver, controls the voting rights, be deemed to be related to one another.

With respect to the second question, in view of our comments above, it may be possible to conclude, subject to the specific facts of your case, that Aco and Bco are not related prior to the shares of Bco being sold.

Again this memorandum is intended for discussion purposes only.