2016-0661071R3 Whether s. 80 or s. 143.4 applies

Principal Issues: Where a plan of compromise and arrangement under the CCAA is approved by XXXXXXXXXX in a particular taxation year and, in the same taxation year, interest on a commercial debt is forgiven, will section 80 or section 143.4 apply?

Position: Section 80 will apply.

Reasons: According to the rules that govern the application of a "forgiven amount," such as subsection 80(3), if a commercial debt obligation is forgiven at any time, the forgiven amount is applied to reduce the particular balance "at that time." On the other hand, under subsection 143.4(4), the "subsequent contingent amount" is deemed to be an amount received under subparagraph 12(1)(x)(i) at that time, but under section 12, an amount is included in income "for a taxation year," which is only accounted for at the end of a taxation year. Further, although there is no carve out under section 143.4 for forgiven amounts, section 143.4 would not apply by virtue of the prohibition against double taxation under subsection 248(28) and the rule that a more specific provision takes precedence over a more general provision.

Author: XXXXXXXXXX
Section: s.143.4(4); s. 80

XXXXXXXXXX                                                                                                        2016-066107

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re:    Advance Income Tax Ruling Request
         XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer (the “Taxpayer”).  We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Taxpayer, none of the issues involved in the ruling request is:

i.    in a previously filed tax return of any of the Taxpayer or a related person;

ii.    being considered by a tax services office or a tax centre in connection with a previously filed tax return of any of the Taxpayer or a related person;

iii.    under objection by the Taxpayer or a related person; 

iv.    the subject of a current or completed court process involving the Taxpayer or a related person; or

v.    the subject of a ruling request previously considered by the Directorate.

This document is based solely on the facts and proposed transactions described below.  The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.  Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars unless otherwise specified.

DEFINITIONS:

“ACB” means the adjusted cost base as this expression is defined in section 54;

“Affected Claims” has the meaning ascribed in Paragraph 5; 

“Affected Creditors” means the holder of an Affected Claim in respect of and to the extent of such Affected Claim;

“Affected Creditor Shares” means the XXXXXXXXXX New Common Shares to be issued under the Plan to the Affected Creditors in satisfaction of their Affected Claims;

“Bank Loans” has the meaning ascribed in Paragraph 5;

XXXXXXXXXX

XXXXXXXXXX

“Cash Amount” in respect of a Cash Election Creditor means the aggregate amount of cash payable to that Cash Election Creditor in respect of a validly made Cash Election;

“Cash Consideration Shares” means the New Common Shares to be issued to the Plan Sponsor and the Equity Subscribers in accordance with the Plan;

“Cash Election” means an election validly made by an Affected Creditor to receive cash in lieu of Affected Creditor Shares which would otherwise be issued to them; 

“Cash Election Creditor” means an Affected Creditor who makes a Cash Election; 

“CCAA” means the Companies’ Creditors Arrangement Act (Canada);

“Claim Settlement Shares” means the Affected Creditor Shares less the number of Cash Consideration Shares;

XXXXXXXXXX;

“Current Year Accrued Interest” has the meaning ascribed in Paragraph 5;

“Elected Share Amount” in respect of a Cash Election Creditor means the aggregate number of New Common Shares which that Cash Election Creditor would have been otherwise entitled to receive under the Plan in respect of which it is entitled to receive its Cash Amount in lieu of receiving such New Common Shares;

“Equity Subscribers” means those certain Affected Creditors, who, in accordance with the terms of the Plan, subscribed for New Common Shares;

“Filing” means the date of the Initial Order, being XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

“Implementation Date” means the date on which the Plan becomes effective, as set out in the Plan; 

“Initial Order” means the initial Order of Court granted on XXXXXXXXXX, as amended, restated or varied from time to time;

“Monitor” means XXXXXXXXXX, in its capacity as XXXXXXXXXX Monitor of the Applicants in the CCAA Proceedings; 

“New Common Shares” means the XXXXXXXXXX common shares in the capital of the Taxpayer to be issued pursuant to the Plan;

“Notes” has the meaning ascribed in Paragraph 5;

“Paragraph” refers to a numbered paragraph in this letter;

“Plan” means the Plan of Compromise and Arrangement proposed by the Taxpayer pursuant to the CCAA and any amendments, restatements, modifications or supplements thereto made in accordance with the terms thereof or made at the direction of XXXXXXXXXX in the Sanction Order;

“Plan Sponsor” means XXXXXXXXXX, the sponsor of the Plan;

“Prior Year Accrued Interest” has the meaning ascribed in Paragraph 5;

“Proposals” has the meaning ascribed in Paragraph 10:

“Remaining Indebtedness” has the meaning ascribed in Paragraph 7(iv);

“Sanction Order” means the order of XXXXXXXXXX sanctioning the Plan;

“Share Amount” in respect of an Affected Creditor means the number of New Common Shares that such Affected Creditor would be entitled to receive under the Plan if such Affected Creditor did not make a Cash Election; 

“Subco” means XXXXXXXXXX, a wholly owned subsidiary of the Taxpayer;

XXXXXXXXXX

“Unpaid Interest” has the meaning ascribed in Paragraph 5, and includes both the Prior Year Accrued Interest and the Current Year Accrued Interest;

“Wind-Up” means the wind-up of Subco into Taxpayer as described in Paragraph 7(ii).

FACTS: 

1. The Taxpayer is a corporation incorporated under and governed by the XXXXXXXXXX.  It is a public corporation resident in Canada and a taxable Canadian corporation within the meaning of the Act.  The shares of the Taxpayer were previously listed on the XXXXXXXXXX (and have been approved for re-listing effective on the Implementation Date) and are currently listed on the XXXXXXXXXX. The Taxpayer’s year end is XXXXXXXXXX. The Taxpayer is served by the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Tax Centre.

2.    The Taxpayer is involved in the XXXXXXXXXX. Through its wholly-owned subsidiaries, the Taxpayer holds indirect interests in certain XXXXXXXXXX in XXXXXXXXXX.

3.    The Taxpayer is the XXXXXXXXXX.

4.    During the XXXXXXXXXX and XXXXXXXXXX, XXXXXXXXXX. On XXXXXXXXXX (the “Filing”), XXXXXXXXXX.

5.    As at the time of Filing, the Taxpayer had XXXXXXXXXX (“Bank Loans”), and XXXXXXXXXX (“Notes”) in an aggregate of $XXXXXXXXXX (Notes, and together with the XXXXXXXXXX, the “Affected Claims”).  While, pursuant to the Initial Order, XXXXXXXXXX as of the date of Filing, as of that date there was approximately $XXXXXXXXXX of XXXXXXXXXX. Of this amount, approximately $XXXXXXXXXX of interest accrued prior to XXXXXXXXXX (“Prior Year Accrued Interest”), with the balance of approximately $XXXXXXXXXX accruing in XXXXXXXXXX (“Current Year Accrued Interest”).

6.    The Taxpayer estimates that it has XXXXXXXXXX for purposes of section 80 so that, after the application of the forgiven amount, the Taxpayer should not have an income inclusion pursuant to subsection 80(13).  

PROPOSED TRANSACTIONS

7.    Pursuant to the Plan, on the Implementation Date, the following transactions, inter alia, will occur:

(i)    The stated capital of the common shares of Subco will be reduced to $XXXXXXXXXX without payment or distribution in respect thereof.

(ii)    Pursuant to an assumption and distribution agreement between the Taxpayer and Subco, XXXXXXXXXX and the XXXXXXXXXX. 

(iii)    The Unpaid Interest will be forgiven, settled and extinguished in full.

(iv)    The outstanding principal amount of each Affected Creditor’s Affected Claim will be forgiven, settled and extinguished to the extent such principal amount exceeds the aggregate of (i) the fair market value on the Implementation Date of the Claim Settlement Shares to be issued to such Affected Creditor pursuant to the Plan (and as set out in Paragraph 7(v)), and (ii) the Cash Amount payable to such Affected Creditor pursuant to the Plan (and as set out in Paragraph 7(v)), the remaining amount of each such Affected Claim following such forgiveness, settlement and extinguishment being the “Remaining Indebtedness”.

(v)    In exchange for, and in full and final settlement of, the Remaining Indebtedness of each Affected Creditor: 

A.    the Taxpayer shall distribute to each Affected Creditor other than Cash Election Creditors, its Share Amount; and 

B.    on behalf of the Taxpayer, the Monitor shall distribute to each Cash Election Creditor its Cash Amount and, if applicable, the Taxpayer shall distribute to each Cash Election Creditor, its Share Amount less its Elected Share Amount.

8.    The Implementation Date will occur before the end of the Taxpayer’s taxation year ending XXXXXXXXXX.

ADDITIONAL INFORMATION

9.    The Bank Loans and Notes are “commercial debt obligations” and are not “excluded obligations” for purposes of subsection 80(1). The borrowings under the Bank Loans and Notes were on capital account, and interest on the Bank Loans and Notes was deductible in computing the Taxpayer’s income under paragraph 20(1)(c).

10.    XXXXXXXXXX (“Proposals”), including from the Plan Sponsor.  The Proposals suggested a XXXXXXXXXX of the Taxpayer XXXXXXXXXX of between $XXXXXXXXXX.  Under the Plan, Affected Creditors are to receive, in the aggregate, XXXXXXXXXX% of the XXXXXXXXXX.  It is noted, however, that the XXXXXXXXXX in determining the value of the New Common Shares issued to the Affected Creditors.

11.    Taking into account all of the Affected Claims together, amount “A” of the formula in the definition of “forgiven amount” in subsection 80(1) would be approximately $XXXXXXXXXX (being the total of the principal amount of the Affected Claims and the Unpaid Interest).  Amount “B” of this formula will be the total of the (i) fair market value of the New Common Shares delivered to Affected Creditors and (ii) the amount of cash delivered to the Affected Creditors, in satisfaction of their Affected Claims.  The forgiven amount under the definition of this term in subsection 80(1) would therefore be the difference between $XXXXXXXXXX and the aggregate fair market value of such New Common Shares plus the amount of such cash.

12.    The forgiven amount will be applied to reduce the tax attributes of the Taxpayer in the manner and in the order set out in section 80.  As described in Paragraph 6, the Taxpayer currently estimates that it has tax attributes (XXXXXXXXXX) in excess of the forgiven amount.  Accordingly, the application of the forgiven amount will reduce these attributes in accordance with the provisions of section 80 and any amount not applied to reduce those attributes would result in an income inclusion under subsection 80(13).

13.    The Taxpayer will elect, in prescribed form within the permitted time, to have subsection 80.01(4) apply to the settlement of any intercorporate debt which occurs on the Wind-Up of Subco.

14.    The reasons for undertaking the Wind-Up, which will be subject to subsection 88(1), are:

(i)    XXXXXXXXXX to the Taxpayer,

(ii)    XXXXXXXXXX, and 

(iii)    to provide the Taxpayer with XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to improve the capital structure of the Taxpayer by reducing the amount of outstanding net debt by approximately XXXXXXXXXX$XXXXXXXXXX (plus accrued interest) on a consolidated basis and providing additional liquidity.  With an improved capital structure, the Taxpayer will benefit from a reduction in its annual interest cost of approximately XXXXXXXXXX$XXXXXXXXXX. 

RULINGS PROVIDED

Provided that

(a)    the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information, and the Purpose of the Proposed Transactions,

(b)    the Proposed Transactions are completed in the manner described above, and

(c)    there are no other transactions which may be relevant to the rulings requested, 

we rule that 

A.    Section 80 will apply to the settlement of the Unpaid Interest and to the settlement of the outstanding principal amount of the Affected Claims in the taxation year ending XXXXXXXXXX, on the basis that these obligations are “commercial debt obligations” and are not “excluded obligations,” as those terms are defined in subsection 80(1).  For greater certainty, this ruling is based on the Implementation Date occurring before XXXXXXXXXX, as described in Paragraph 8.

B.    On the basis that section 80 will apply to the settlement of the Unpaid Interest in the taxation year ending XXXXXXXXXX, as described in Ruling A above, subsections 143.4(2) and (4) will not apply to any right to reduce the Unpaid Interest that might arise in the taxation year ending XXXXXXXXXX.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Plan is implemented on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a)    the fair market value or ACB of any property or the paid-up capital of any shares referred to herein;

(b)    the reasonableness or fair market value of any fees or expenditures referred to herein;

(c)    the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein; and

(d)    any tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the rulings given above;

Without restricting the generality of the preceding statement, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any of the tax consequences of the transactions relating to the Wind-Up of Subco into the Taxpayer, including the reduction in the stated capital of the common shares of Subco, as described in Paragraphs 7(i) and 7(ii).

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section 
Reorganizations Division 
Income Tax Rulings Directorate

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2017

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2017