Delta 9 Cannabis – Alberta Court of King’s Bench determines that a reverse vesting order should not permit the target corporation to transfer out future s. 80 income tax liabilities

A cannabis producer (“Bio-Tech”) had entered CCAA proceedings. A requested reverse vesting order (RVO) contemplated that an arm’s length purchaser would acquire all the Bio-Tech shares and that a residual company (“ResidualCo”) would have transferred to it excluded assets and liabilities. The excluded liabilities included taxes owing or accrued due by Bio-Tech for the period prior to the CCAA filing date. However, the draft RVO also provided that such excluded taxes would include any taxes related to debt forgiveness arising from or in connection with the consummation of the transaction.

CRA argued successfully that s. 80(13) would operate to include forgiven debt amounts in the income of Bio-Tech on the future date when the transfer to ResidualCo occurred and the Court could not approve a provision in a transaction contract that required the Minister not to apply the ITA regarding the application of s. 80(13) to Bio-Tech. Marion J. ordered that the wording of the RVO was to be amended to include language that made it clear that it did not apply to any future inclusion of income to Bio-Tech pursuant to s. 80.

This conclusion is likely to limit the practical viability of an RVO where the application of the debt-forgiveness rules has a material impact on the subject corporation.

Neal Armstrong. Summary of Delta 9 Cannabis Inc (Re), 2025 ABKB 52 under s. 80(13) and summary of Chris Lang, “Debt Restructuring Using a Reverse Vesting Order: Tax Issues,” Canadian Tax Focus, Vol.15, No. 2, May 2025, p. 2 under s. 80(13).