Tax Planning During an Economic Slowdown

Transcription

1 During an Economic Slowdown Andrew Bateman, Felesky Flynn LLP, Felesky Flynn LLP Calgary, AB Introduction A slowing economy may give rise to a changing set of business circumstances, which may involve: Economic losses Shortage of cash and/or credit Debt refinancing Loss of business contracts Loss of employees Increased focus on efficiency and cost control 2

2 Introduction A slowing economy also may give rise to a different set of tax considerations, which possibly include: Increased focus on tax efficiency overall (e.g., cost control) Realizing, utilizing and preserving losses Obtaining advice on refinancings and restructurings Greater focus on deferring taxes and recovering taxes paid Seeking future tax benefits based on low current asset valuations Adjusting strategies in tax disputes 3 Agenda Loss utilization Impaired debt planning Depressed values Other opportunities Selected pitfalls 4

3 Conventional Related Group Planning Amalgamations Post amalgamation losses available going-forward and to carry back to parent on a vertical short-form Pre-amalgamation losses available going-forward Wind-Ups Post wind-up losses available going-forward and to carry back to parent Pre wind-up losses of subsidiary available to parent for tax years commencing after commencement of wind-up 5 Conventional Related Group Planning Tax deferred transfers of property with inherent gains or that is generating profits to loss corporations Form partnership to combine profit and loss businesses Management Fees Although these are often inappropriately used and insufficiently documented Debt/Preferred Share Structures Profitco borrows to invest in shares of related corporation, often using a daylight loan Numerous rulings 6

4 Less Conventional Related Group Loss Planning Example Stow (2010 TCC) Two corporations owned by taxpayer s spouse formed general partnership and incurred large currency trading losses (on an 80/20 basis) Two weeks later (after losses incurred) taxpayer acquired 80% interest in the partnership 80% of partnership loss allocated to taxpayer at end of partnership fiscal period Partnership continued for several years Held: S. 103 did not apply 7 Partnership Example Continued Loss business could be carried on by existing partnership or transferred into a new partnership Prior to fiscal period end, a related person or entity best able to use the losses could acquire substantial partnership interest Loss could offset income from other sources, or be carried back to prior years Deferral advantages may arise after the business becomes profitable again, or structure could be unwound Liability issues may pose practical limitations 8

5 Third Party Loss Utilization or Monetization Generally, transactions that seek to use an unrelated person s losses are subject to much more restrictive streaming rules or may be viewed as aggressive Same or similar business type transactions generally are the easiest to close and lead to the least uncertainty (and highest price for losses) Nevertheless, other transactions also are undertaken to monetize tax attributes (very fact specific) 9 Impaired Debt Planning Doubtful or bad debts Debt forgiveness rules Allowable business investment losses ( ABILs ) Asset seizure rules 10

6 Doubtful or Bad Debts Main provisions - paragraphs 20(1)(l) and 20(1)(p) and subsection 50(1) Important considerations: Have all possible doubtful/bad debts been considered (e.g., accrued but unpaid fees)? Does a taxpayer s ordinary business include the lending of money? For bad debts, what measures have been taken? 11 Debt Forgiveness The general requirements for section 80 to apply are: 1) there is a commercial obligation (being a commercial debt obligation or distressed preferred share) 2) issued by a debtor 3) that is settled or extinguished (various deeming rules may apply) 4) there is a forgiven amount (being the lesser of the amount for which obligation was issued and principal amount, minus the amount paid in satisfaction of the obligation, if any) 12

7 Debt Forgiveness Where the rules apply, a forgiven amount is applied to: (1) mandatorily reduce certain tax attributes, (2) optionally reduce certain tax attributes, and (3) result in an income inclusion at 50% of any remainder Certain deeming rules may also cause debt forgiveness to apply: - amalgamations and wind-ups - debt parking rules - statute barred debt 13 Debt Forgiveness Important planning considerations: insolvency deduction reserve for corporations (5 year) or individuals discretion of Minister to re-designate results transfer of forgiven amount to related persons distressed preferred shares debt parking exceptions income debts, 80% threshold 14

8 ABILs The general requirements to claim an ABIL: 1) a taxpayer realizes a capital loss 2) resulting from a disposition of property to which subsection 50(1) applied, or to an arm s length person 3) where the property was a share of a small business corporation ( SBC ), or a debt payable by a SBC, but excluding debt payable to a corporation by a non-arm s length person 4) to the extent the capital loss exceeds certain other amounts 15 ABILs Possible issues include: Demonstrating that a purchaser is arm s length Establishing a debt as bad Debt forgiveness (and debt parking) consequences Proving the SBC requirement is satisfied ABIL limitation rules Acquisition of control ABILs not permitted 16

9 Seizure Rule Where a property is seized, the creditor is deemed to acquire it at a cost equal to the amount of the debt Debtor is deemed to dispose of the property for the same amount The character of the seized property to the creditor is not necessarily dictated by the character of the debt to the creditor or seized property to the debtor Disposition of the seized property may result in a more favourable result to the creditor or the debtor May, for example, replicate ABIL result 17 Seizure Rule Examples B.C. Ltd. (2001 TCC): Taxpayer sold service station; consideration included vendor take back debt Buyer agreed to transfer station back to taxpayer for (among other things) release on debt Deemed cost of station per s exceeded value Taxpayer claimed write down under s. 10(1) Held: On the facts, the station was not inventory or part of an adventure in the nature of trade 18

10 Seizure Rule Examples Continued Saskatchewan Wheat Pool (2008 TCC): Taxpayer owned 40% of corporation s shares and debt Corporation used debt to acquire land on income account Taxpayer acquired 40% interest in land in satisfaction of debt; deemed cost exceeded value Taxpayer intended to sell as soon as possible and realized an accounting profit Held: Loss on income account; fully deductible 19 Seizure Rule Examples Continued B.C. Ltd. (2014 TCC): Taxpayer loaned money to arm s length corporation Corporation could not repay and taxpayer acquired patents owned by the corporation as a result Deemed cost/ucc of patents exceeded value Approximately two years later patents were transferred to a related corporation and a terminal loss was claimed Held: Patents were acquired for purpose of earning income; terminal loss allowed 20

11 Seizure Rule Take Aways Particularly useful where doubtful/bad debt rules or ABIL rules are not satisfied Very important to take steps to support the desired character of the property in the hands of the creditor Particularly in non-arm s length situation, consider implications to the debtor 21 Depressed Values Depressed asset values may cause certain transactions to be desirable: Estate freeze, refreeze or thaw Taxable contributions to a family trust Emigration from Canada (becoming non-resident) Transfer of assets to low tax jurisdiction Acquisitions e.g., arm s length, shotgun clauses Inventory writedowns Triggering hedging gains and losses 22

12 Depressed Values Re-freeze Example BEFORE AFTER Mr. X preferred shares FMV $10 Million ACB $500,000 Mr. X preferred shares FMV $1 Million ACB $500,000 after initial freeze after refreeze during economic slowdown 23 Other Opportunities Year-End Changes Changing corporate year end to accelerate loss carryback Techniques GAARable? Information Circular 88-2, paragraph 21 Blackberry Remission Order Deferral partnerships S. 34.3: May reduce accrual based on actual Collapse or change year if a loss 24

13 Other Opportunities Long-Term Incentive Plan Refresh Reprice underwater options Convert cash draining plans into stock plans Convert employer deduction plans into non-deductible stock plans with better tax result Including employee buyco structures 25 Pitfalls in Troubled Times Loss issues loss restriction event loss suspension or denial rules consider a loss determination request Cash issues - GST/employee source deductions Tax liability issues sections 159 and 160 Contract termination payments and receipts Damage payments and receipts Large corporation status 26

14 Pitfalls in Troubled Times Director Liability Example Directors A B C Collected but unremitted GST $1 million 27 Recap Loss utilization Impaired debts Depressed values Other opportunities Other pitfalls 28

15 Questions? 29