Generally no application of s. 128(1)(g) where proposal accepted (p. 8)
- Although s. 128(1)(g) provides that any losses of the corporation for a taxation year preceding that in which an “absolute order of discharge” is granted will not be deductible in any subsequent year, if a bankrupt is successful in having a proposal accepted by its creditors, the bankruptcy would typically be annulled under BIA s. 61(1), so that no absolute order of discharge is issued (pursuant to an application under BIA, ss.169(4)), and the losses appear to be eligible for carryforward even though the debts likely are not paid in full.
Notwithstanding IT-293R, para. 26, there may be no forgiven amount even though debtor’s proposal subsequently approved (pp. 8-9)
- Although under para. (i) of the definition, there is no “forgiven amount” where the debtor is a “bankrupt” at the time of the forgiveness, CRA considers (see 2010-0387451C6 and IT-293R, para. 26) that where a bankrupt’s proposal is approved by the Court, the bankruptcy is annulled, so that the debtor is not considered a bankrupt at the time of any prior debt settlement. However, Med Finance Co. S.A. v Bank of Montreal, 1993 CarswellBC 532 (BCSC) (which stated that the word annul “does not mean annul ab initio, but has effect only from the date the order is made and not retrospectively”) instead suggests that the debtor is still a bankrupt at the time of the debt settlement, notwithstanding the subsequent annulment, so that no forgiven amount should arise.
Description of credit bid (pp. 11-12)
- Under a credit bid, which allows an existing secured creditor to bid up to the full face amount of their secured debt claim as currency for the acquisition of the debtor’s assets, the secured debt may be transferred by the secured creditors to a newly-established “CreditBidCo” in consideration for equity, so that CreditBidCo then acquires the debtor’s assets (and assumes some operating liabilities), with the full amount of its secured debt claim being extinguished.
Barter exchange characterization if s. 79 inapplicable (pp. 12-13)
- In the absence of s. 79, the better view is that CreditBidCo is paying for the assets by agreeing to dispose of its secured debt having a value equaling to the net fair market value (“FMV”) of the underlying collateral (and that such amount constitutes the sale price to the debtor, being the secured creditors’ agreement to settle their debt claims for a value equaling the same net FMV), so that the proceeds of disposition to the debtor, the tax cost of the assets to CreditBidCo, and the repayment of the secured debt for s. 80 purposes reflects the assets’ current FMV.
Whether s. 79 applies (pp. 13-16)
- Where s. 79 applies on a credit bid, the debtor would likely have proceeds of disposition exceeding the assets’ FMV and no forgiven amount, whereas the creditor would likely have tax cost in the assets exceeding their FMV.
- S. 79 may not apply based on the narrow meaning of "in consequence of" (see, e.g., Hallbauer) and the (Brill-based) proposition that “where property is acquired by a creditor under an agreement with the debtor for a fixed price, section 79 should not be applicable.”
- Greater certainty on s. 79 not applying may be achieved with a three-party arrangement under which CreditBidCo would directly acquire the debtor’s assets, and in consideration it would issue its shares to the secured creditors who would agree to the extinguishment of their debt claims against the debtor.
Accessing debtor’s losses (p. 16)
- CreditBidCo might then acquire the debtor’s shares and wind it up so as to access its tax attributes (see 2017-0711071R3 and 2005-0140981C6).
Words and Phrases
in consequence ofDescription of reverse vesting transaction (pp. 17-18)
- In a “reverse vesting transaction”, the obligations of the debtor which are to be settled without payment are vested out of it and assumed by a new corporation (“ExcludedCo”), with the debtor corporation (owing only those debts to be retained or satisfied) being acquired by the new owner(s) (which could be secured creditors), and with ExcludedCo then being wound-up or placed into bankruptcy.
- Examples include Plasco Energy Group (in 2015), and then Stornaway Diamond Corporation, Wylan Group, Comark Holdings Inc. and ILTA Grain Inc.
Consequences of reverse vesting transaction (pp. 17-19)
- Two advantages of reverse vesting transaction are that they only require Court approval, not a creditor vote, and avoid commercial issues of an asset sale.
- The assumption by ExcludedCo will be specified to entail a novation of the debt, so that the original debtor is released, and s. 80 applies accordingly.
- Thus, the new equity owners effectively acquire the debtor’s tax losses and other tax attributes subject to s. 80 grinds and the ss. 111(4) and (5) restrictions (and also may enjoy a high historic PUC in the debtor’s shares) - whereas an asset acquisition transaction generally would entail the assets being acquired at a FMV cost substantially less than the debtor’s existing tax attributes.
Interest stops rule applicable to unsecured debt (pp. 21-23)
- Under the interest stops rule, interest on unsecured provable claims stops accruing at the commencement of relevant proceedings, given that all unsecured creditors should generally receive equal treatment, so that the assets should be distributed amongst the unsecured creditors pro rata to their claims existing at the time of the insolvency.
- Although the application of the interest stops rule to deny a no legal entitlement to interest following the filing of the initial order in a CCAA proceeding may result in such accrued interest not being deductible, Nortel noted that a Plan might provide for the payment of post-filing accrued interest.
- If this occurs there would be the Barbican/Mid-West Abrasive issue regarding a legal obligation arising after the year in which the interest accrued not being sufficient for the interest to be deductible in the earlier year (or the later year when the legal obligation arose).
- As the Bankruptcy and Insolvency Act is fundamentally a statute dealing with unsecured creditors, applying the interest stops rule to secured creditors in CCAA proceedings could create an inappropriate asymmetry between the BIA and the CCAA.
Effect on secured and unsecured creditors of stay order (pp. 24-26)
- Irrespective of the interest stops rule, in 2008-0304841I7 and 2009-0314641I7, CRA indicates that the initial stay order in a CCAA proceeding means that any creditor cannot enforce payment, so that the “legal obligation” requirement in s. 20(1)(c) is not met.
- This appears to confuse a stay of the right to enforce payment and the termination of that right.
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