Words and Phrases - "winding-up"
Michael Kandev, Olivia Khazam, "Was there a ‘Liquidation and Dissolution’? A (Corporate) Existential Question", International Tax (Wolters Kluwer CCH), No. 118, June 2021, pp. 8-9
Commercial understanding of “liquidation” and “dissolution” (p. 8)
I]t is reasonably clear that the terms "liquidation" and "dissolution" each have generally accepted and well-understood meaning for Canadian legal practitioners. "Liquidation" generally refers to the factual process of satisfying a corporation's creditors and distributing its remaining assets to its shareholders, and "dissolution" generally refers to the acceptance by the relevant corporate registrar of the corporation's articles of dissolution, which terminates the corporation's legal existence. It is broadly understood that a corporation is "liquidated" before it is "dissolved".
Use of “winding-up” in domestic provisions (p. 9)
What appears to be important in determining whether a corporation has been "liquidated" or "wound-up" is the broad substance of what occurred: Was there a realization of the corporation's assets (if any), a discharge of its liabilities (if any), and a distribution of its surplus (if any) to its shareholders? Canadian courts have qualified transactions and events as "liquidations" or "winding-ups" where, in substance, the corporation was left with no property and no liabilities and the surplus (if any) had been distributed to its shareholders. [citing Dauphin Plains and Smythe].
CRA interpretation of “liquidation and dissolution” (p. 9)
Based on [2003-0034311E5], whether a "liquidation and dissolution" of an FA has occurred is arguably not determined by reference to the specific requirements of Canadian corporate law statutes, but rather by reference to the broader meanings of "liquidation" and "dissolution" in Canadian corporate law parlance. The CRA seems to consider that it is the substance of what occurred (as opposed to the form) that is important.
Ian Bradley, Jonathan Bright, "The Stop-Loss Rules and Corporate Reorganizations – Interpretive Challenges", Canadian Tax Journal, (2019) 67:2, 383-410
Interpretation of "merger or combination" (pp. 391, 394, 396)
The CRA's interpretation of subparagraph 40(3.5)(c)(i) [in 2017-073715117] is based heavily on its interpretation of certain words in the provision—in particular, that the words "merger or combination" can include a winding up, and that "the corporation formed" on a merger combination can--refer to a shareholder of a woundup corporation. …
[A]ll three Terms—"winding up, '' “dissolution," and "liquidation"—are generally understood to refer to the same process, through which a corporation transfers its assets and ceases to exist….
[I]n the French version of subparagraph 40(3.5)(c)(i), the words "fusion" and “combinaison" are used in place of "merger" and "combination." In Quebec corporate law, the term "fusion" appears to be used as the French equivalent of the English word “amalgamation. … [I]t suggests that the word "merger" in subparagraph 40(3.5)(c)(i) (and, by extension, the word "fusion" as it was used by the court in Black & Decker) more appropriately refers to amalgamations (and similar foreign reorganizations), rather than having the broader connotations suggested by the CRA.
Interpretation of "formed" (pp. 396 – 398)
[T]he word “formed” appears to refer to a corporation that comes into existence as a result of the merger or combination, such as a corporation formed on an amalgamation. … [T]he Tax Court of Canada appears to have interpreted the word “formation" in a similar manner in … 1591141 Alberta …, 2014 TCC 2 . …
[E]ven if a winding up … could be considered a "merger" or a "combination" under a broad operational definition of those terms, it could not be a merger or combination described in subparagraph 40(3.5)(c)(i) because it does not result in the formation of a corporation… .
The CRA claimed [in 2017-073715117] that subparagraph 40(3.5)(c)(i) can apply to a winding up of a corporation with multiple shareholders… .
[A] transaction that resulted in the formation of multiple entities would not be a merger or combination; it would be closer to a spinoff or division transaction (such as the transactions described in section 86.1 and subsection 15(1.5)). The Interpretation Act [s. 33(2)] cannot alter the fundamental meshing of subparagraph 40(3.5)(c)(i) and the words used in this provision.
Context to merger or combination concept (pp. 399 – 402)
[T]he CRA noted that certain provisions in the Act that refer to mergers or combinations expressly exclude transactions that involve the distribution of property upon the winding up of a corporation. These provisions include … subsections 87(1) and (8.1) … as well as…subsection 87(8.2)… .
… The exclusion of windups in the "amalgamation" and "foreign merger" definitions does not mean that every winding up would otherwise be considered a merger or combination….
[A]bsorptive mergers…involve elements of both amalgamations and windups. …
[A] plan of arrangement may be used to achieve a result similar to an absorptive merger… .
[T]he word "unification" is not used in the French version of paragraph 40(3.5)(c). This suggests that the word “merger" in subparagraph 40(3.5)(c)(i) is intended to refer to amalgamations (and possibly to similar foreign transactions), or at least that the word "merger" is used somewhat interchangeably with "amalgamation" in this context, rather than having a broader meaning.
… [S]ubsection 90(6.11)…indicates that windups and mergers are distinct types of corporate reorganizations… .
Likely limitation of merger concept to amalgamations or near equivalents (pp. 403-404)
[I]f [CRA’s] interpretation were correct, subparagraph 40(3.5)(c)(i) would apply to all of the transactions described in subparagraphs 40(3.5)(c)(ii) and (iii)… .
… The CRA’s interpretation would therefore render subparagraphs 40(3.5)(c)(ii) and (iii) redundant… .
… Interpreting subparagraph 40(3.5)(c)(i) in its statutory context therefore indicates that the provision applies to Canadian amalgamations and similar foreign reorganizations, in which two or more companies merge to form a single corporate entity (such as foreign mergers described in subsection 87(8.1).) …
[T]here is a simpler explanation for the explicit exclusion of transactions described in paragraph 40(3.5)(b): these transactions include amalgamations and foreign mergers. For example, if subsection 40(3.4) applies to a disposition of shares of a particular corporation, and those shares are subsequently exchanged for new shares on an amalgamation of the particular corporation, subsection 87(4) may apply to the share exchange. In these circumstances, paragraph 40(3.5)(b) will deem the new shares to be identical to the old shares. But for the exclusion of paragraph 40(3.5)(b) transactions in subparagraph 40(3.5)(c)(i), this provision would also apply (to deem the corporation formed on the amalgamation to own the old shares while it is affiliated with the transferor). The exclusion therefore plays a clear role in the overall context of the stop-loss rules: it prevents two different continuity rules from applying to the same amalgamation (or foreign merger), producing different (and potentially conflicting) results. It does not mean that subparagraph 40(3.5)(c)(i) would otherwise apply to all share exchanges.
Explanatory Notes (pp. 405-406)
Paragraph 49(3.5)(c) was amended to take on its current form in 2013… .
[T]he technical notes do not explain why the word “combination” was added to subparagraph 40(3.5)(c)(i). … [T]his change may have been intended to address foreign reorganizations that are similar to Canadian amalgamations. There is no indication that subparagraph 40(3.5)(c)(i) was meant to address windups. … .
Example of uncertainties generated by CRA approach (pp. 387-388, 408)
BB Inc. a corporation resident in Canada…is the sole shareholder of BB Stars and BB Stripes, both of which are corporations resident in the United States…
BB Inc. and BB Stripes are equal (50 percent) shareholders of BB Freedom…also a corporation resident in the United States…
BB Inc. transfers its 50 percent interest in BB Freedom to BB Stars…BB Inc. has a loss on the transfer, which is suspended by subsection 40(3.4).
BB Freedom files articles of dissolution and makes liquidating distributions to both BB Stars and BB Stripes.
Although the liquidation and dissolution or BB freedom appears subparagraph 40(3.5)(c)(iii) would not apply, because the transferor (BB Inc.) is not a foreign affiliate. Many practitioners have believed for some time that in this scenario the suspended loss on the BB Freedom shares would be released upon BB Freedom's winding up, because a winding up of this type is not described in subparagraph 40(3.5)(c)(ii) or (iii). However, the CRA has challenged this widely held belief….
[I]f the CRA's interpretation of subparagraph 40(3.5)(c)(i) were correct, the winding up of BB Freedom would not release the suspended loss on its shares. BB Stars and BB Stripes would be deemed to own the shares of BB Freedom while they remained affiliated with BB Inc. If BB Inc. subsequently sold BB Stripes to a non-affiliated person, it is not clear how this would affect the suspended loss. When commenting on a winding up of a corporation with multiple shareholders, the CRA stated that subparagraph 40(3.5)(c)(i) would deem each shareholder to own its respective interest in the shares of the wound-up corporation. The CRA might therefore consider BB Stripes to own 50 percent of the BB Freedom shares, suggesting that the BB Stripes sale could release 50 percent of the suspended loss. However, there does not seem to be support for such an approach in the words of the provision.
Consider the alternative scenario depicted in figure 2. In this example, BB Stripes is always owned by a non-affiliated person (rather than BB Inc.). The winding up of BB Freedom would not be a DLAD and would therefore be taxable under the foreign affiliate rules. However, if the CRA's interpretation of subparagraph 40(3.5)(c)(i) were correct, it appears that the provision could still apply in these circumstances. It is not clear whether this winding up would release 50 percent-of the loss (since the 50 percent shareholder of BB Freedom would be a non-affiliated person) or whether the full loss would remain suspended.
These difficulties result from attempting to stretch the application of subparagraph 40(3.5)(c)(i) beyond its intended scope.
Policy driver behind CRA position (p. 410)
[T]he CRA’s interpretation of subparagraph 40(3.5(c)(i) appears to be driven by a policy goal that suspended losses should not be released as a result of a winding up that is not subject to Canadian tax (either because the winding up qualifies for Canadian tax deferral or because the parties to the winding up are outside the reach of the Canadian tax system). However, this policy objective seems to be inconsistent with the scope of the existing rules … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 33(2) | 126 |
Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., 80 DTC 6123, [1980] CTC 247, [1980] 1 S.C.R. 1182
The appellant was a secured debentureholder who, following default by the debtor (“Xyloid”), obtained a court order for the appointment of a receiver. Xyloid had paid only the net amount of wages to employees prior to the appointment of the receiver, and did not have the funds to remit the required amount of source deductions. S. 71(3) of the Unemployment Insurance Act, 1971 (and somewhat similarly a CPP provision) provided that “in the event of any liquidation, assignment or bankruptcy of an employer,” there was a deemed trust in favour of the federal Crown equal to the applicable source deduction amount “whether or not that amount has in fact been kept separate and apart… .”
In finding that the process followed by the receiver amounted to a “liquidation” of Xyloid, Pigeon J stated (at pp. 6129-6130):
We are here dealing with a receivership which was completed by the sale and distribution of all the assets of the employer company. In the statutes of Canada as they stood when the two provisions we have to construe were enacted, “liquidation” was not the word used to describe the voluntary or forced distribution of the asset of a company, the word used was “winding-up… . However, the word liquidation was sometimes used to describe this process of dissolution of a company… .
It seems to me that it would not make sense to hold that, because the assets of a company were realized by a receiver appointed at the request of a creditor rather than by a liquidator or a trustee in bankruptcy appointed by a court, the claim for wages should fail. It appears to me that there is no reason not to give the word “liquidation’ its wide meaning in usual language.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) | receiver-manager included | 25 |
| Tax Topics - Income Tax Act - Section 159 - Subsection 159(2) | 36 | |
| Tax Topics - Income Tax Act - Section 227 - Subsection 227(5) | 41 | |
| Tax Topics - Statutory Interpretation - Interpretation Act - Section 17 | 38 |
Kvas v. The Queen, 2016 TCC 199
The general contracting company (“CIA”) of two brothers was dissolved in January of 2008 (the “Dissolution Date”) for failure to file Ontario corporate tax returns. Although “upon such dissolution, the property of CIA technically and legally escheated to the provincial Crown” (para. 40), in fact, a CIA bank account was thereafter used to pay various CIA creditors. In addition to being assessed under s. 160 on the basis of alleged property transfers to them after the Dissolution Date, they were treated as having received a deemed dividend under s. 84(2). However, this position was implicitly dropped by Crown counsel in closing argument, where no mention was made of it.
In indicating that s. 84(2) did not apply, Bocock J stated (at para 23):
Factually, CIA was dissolved involuntarily… . A winding-up transaction referenced in subsection 84(2) involves a more orderly and conceived transaction or series of transactions undertaken by the directors during winding-up, culminating in the final act of dissolution, reorganization or arrangement. This did not factually occur.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) | involuntary dissolution did not render the corporation a transferor | 195 |
Perrault v. The Queen, 78 DTC 6272, [1978] CTC 395 (FCA)
A substantial dividend was not paid on the "winding-up, discontinuance or reorganization" of a company's business because, following the payment (and the sale of one of the company's two plants), the company continued to carry on business for over a year, "albeit on a reduced scale". (p. 6277) (s.81(1) of the old Act)
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | dividend satsified share purchase consideration | 114 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) | 32 | |
| Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) | 48 |
Smythe et al. v. Minister of National Revenue, 69 DTC 5361, [1969] CTC 558, [1970] S.C.R. 64
The taxpayers were shareholders of a company (the "old company") who effectively converted its assets to cash through a series of transactions: those assets were sold to a related company owned in essentially the same manner (the "new company") in consideration for a promissory note; the note was paid-off through bank borrowings of the new company; the old company used those cash proceeds to invest in preference shares of two unrelated companies (the "dividend-stripping companies"); and the taxpayers sold the shares of the old company to the dividend-stripping companies for a cash amount based on the old company's net asset value. A portion of the cash proceeds of the sale were reinvested by the taxpayers in debentures of the new company. In finding that these transactions were governed by s. 81(1) of the pre-1972 Act, with the result that the taxpayers were deemed to receive a dividend, Judson J. stated (p. 5364) that:
"There was a winding-up and a discontinuance of the business of the old company, although it is apparent that there was no formal liquidation under the Winding-Up Act or the winding-up provisions of the Ontario Companies Act."
Judson J also found that the purported sale of the shares of the old company to the dividend-stripping companies should be disregarded.
Merritt v. MNR (1941), 2 DTC 513 (Ex Ct), rev'd [1942] S.C.R. 269, 2 DTC 561
The Premier Trust Company ("Premier") acquired all the shares of the taxpayer and other shareholders of the Security Loan and Savings Company ("Security") in consideration for (at the option of the shareholder) 1.5 shares of Premier for each Security share, or a combination of cash of $102 and 0.5 shares of Premier for each Security share. The taxpayer opted to receive cash and shares. Security then amalgamated with Premier. The Minister assessed under s. 19(1) of the Income War Tax Act, which provided that:
on the winding-up, discontinuance or reorganization of the business of any incorporated company, the distribution in any form of the property of the company shall be deemed to be the payment of a dividend to the extent that the company has on hand undistributed income.
A portion of the consideration so received by the taxpayer would have been includable in her income (under s. 19(1)) to the extent of her share of the "undistributed income" (i.e., accumulated retained earnings) - but for the fact that the Act was interpreted as excluding from undistributed income the income which Premier had earned prior to 1935 (the point on which the case was reversed in the Supreme Court of Canada). McLean J. noted that on the facts there clearly was a discontinuance ("whether that was bought about by a sale to or amalgamation with the Premier Company") or a winding-up of the business (notwithstanding the absence of a formal liquidation procedure), and that the transactions resulted in a distribution of Security property notwithstanding "that the consideration received by the Appellant for her shares happened to reach her directly from the Premier Company and not through the medium of the Security Company (p. 516).
Gilmour v. The Queen, 81 DTC 5322, [1981] CTC 401 (FCTD)
The taxpayer was the sole individual shareholder of a personal corporation ("LVG") which, in turn, owned approximately 1/3 of the common shares of another corporation ("Trident") which was engaged in the oil business through holding controlling shareholdings in three corporations. Trident realized proceeds as a result of a sale of the most valuable of these subsidiaries and distributed the proceeds to its shareholders, including LVG, on March 22, 1971 and on August 3, 1971 in anticipation of the liquidation and winding-up of Trident.
Collier J. found (at p. 5324) that "as a practical matter there was a 'discontinuance or reorganization' of Trident's business in 1971 and that the amounts received were "on" such event notwithstanding that they were in anticipation of the formal winding-up of Trident and that there was a possibility, due to warranties given on the sale, that some of the money received might have to be returned.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | 99 |