Section 80. Tax Law for Lawyers June 2, 2011 Ron Durand STIKEMAN ELLIOTT LLP

Transcription

1 Section 80 Tax Law for Lawyers June 2, 2011 Ron Durand STIKEMAN ELLIOTT LLP

2 Borrowings Used: > To pay expenses > To acquire property Section 80: > Reduces losses > Grinds basis > Uses an income inclusion to prevent hiding losses or basis STIKEMAN ELLIOTT LLP SLIDE 1

3 Former Rule: > Reduce losses > Grind basis > Any excess simply disappeared Former Planning Techniques: > Transfer assets to subsidiary or to a partnership > Debt parking > 7000(1)(a) > fmv of shares issued for debt irrelevant STIKEMAN ELLIOTT LLP SLIDE 2

4 Nature of Legislation > It sweats difficulty at every paragraph > Every provision breeds a dilemma > Every clause ends in a cul-de-sac > Dangers lurk in every line > Mischiefs abound in every sentence > An air of evil hangs over it all STIKEMAN ELLIOTT LLP SLIDE 3

5 Legislation, which, although it may be easy to understand, people continually try to misunderstand, and in which therefore it is not enough to attain to a degree of precision which a person reading in good faith can understand; but it is necessary to attain if possible to a degree of precision which a person reading in bad faith cannot misunderstand. Stephen J. In re Castioni (1891) 1 Q.B. 149, 167 STIKEMAN ELLIOTT LLP SLIDE 4

6 Rules apply where there is: > A commercial obligation 248(26) definition of obligation 80(2)(b) interest Distressed preferred share > A debtor Includes a partnership STIKEMAN ELLIOTT LLP SLIDE 5

7 Rules apply where there is: > A forgiven amount Amount of debt less amount paid to settle debt Numerous anti-double counting rules > A settlement Settled or extinguished Exception for distress preferred shares Parked obligation Statute barred STIKEMAN ELLIOTT LLP SLIDE 6

8 Settlement > Amount Paid: Fair market value of shares / increase in value of shares Principal amount of any new debt Does not include amount forgiven by bequest > Parked Obligation: Cost less than 80% of principal amount Significant shareholder (25% votes or value) or non-arm s length Specified obligations; generally acquired from arm s length person Order of significant shareholder and specified obligation does not matter 80.01(10) deduction where debt is subsequently repaid STIKEMAN ELLIOTT LLP SLIDE 7

9 Debt Substitution old debt- $10 million new debt (a) - $7 million at 10% - p + i due in 4 years - $3 million debt forgiveness - $3 million interest expense (b) - $10 million with no interest - due in 4 years - 0 debt forgiveness -0 interest STIKEMAN ELLIOTT LLP SLIDE 8

10 Significant Shareholder Trap 2007 > creditors agree to 70 on the $1 > main banker acquires old debt from syndicate for 70 on the $1 as part of settlement > main banker agrees to waive interest for next 5 years > main banker gets warrants to acquire preferred shares 2009 > main banker exercises warrants and acquires prefs representing 15% of total share value 2011 > common shares drop in value and pref become worth 26% of total share value STIKEMAN ELLIOTT LLP SLIDE 9

11 Partial Parking (27) 1. settle $10 million debt for $7 million $3 million forgiven amount 2. settle $8,750,000 debt for $7 million no forgiven amount settle $1,250,000 debt for $1 $1,250,000 forgiven amount STIKEMAN ELLIOTT LLP SLIDE 10

12 Basic Rules Forgiven amount is reduced by: A) Loss carry forwards B) Amortizable basis C) Basis in non-related entities D) Transfers to directed persons any remaining amounts produces : E) Income inclusion STIKEMAN ELLIOTT LLP SLIDE 11

13 Capital Properties Three categories: I. Acb of shares less that 10% holding or unrelated partnership II. III. Acb of shares 10% or more, but not related Acb of shares related or related partnership All prior categories must first be exhausted No advantage to III if such entities retain tax attributes STIKEMAN ELLIOTT LLP SLIDE 12

14 A. 1. Operating losses 2. Capital losses B. 3. Depreciables 4. Eligible capital 5. Resource pools C. 6. Cat. I capital Non connected persons 7. Current year capital losses 8. Cat. II capital Connected corporations STIKEMAN ELLIOTT LLP SLIDE 13

15 D. 9. Transfers to directed persons 10. Cat. III capital Related persons E. 11. Income inclusion STIKEMAN ELLIOTT LLP SLIDE 14

16 Hiding Depreciables OPCO assets 40% PRE-EXISTING CORP NEW SUB STIKEMAN ELLIOTT LLP SLIDE 15

17 Hiding Losses > debtor is a subsidiary of a Canadian holding company > debtor has substantial loss carryforwards > debtor is wound-up into parent, with parent assuming debt > after wind-up but in the same taxation year of parent debt is settled > 88(1.1) and (1.2) say loss carryforwards not available to parent in year of winding-up STIKEMAN ELLIOTT LLP SLIDE 16

18 Doubling Up Acquisitionco HOLDCO - capital losses debt Opco - operating losses New Sub assets STIKEMAN ELLIOTT LLP SLIDE 17

19 Income Inclusion [80(13)] > Unapplied amount (ignoring transferred amounts) > Plus cat. III amounts, up to tax attributes of directed persons > Amounts transferred to directed persons > 50% inclusion for non-partnership amounts STIKEMAN ELLIOTT LLP SLIDE 18

20 Reducing the Hit > large operating loss carryforward > small pool balances > accelerate income by receiving prepaid amounts followed by a year end, then settlement income absorbed by losses almost all forgiven amount results in a 50% income inclusion over 5 years STIKEMAN ELLIOTT LLP SLIDE 19

21 Reducing the Hit - example > debtor has $100m of loss carryforwards > debtor pays $33m per year in salaries > debtor transfers all operations, except employees, to a subsidiary > subsidiary pays debtor $100m for provision of employees over next 3 years > no 20(1)(m) reserve, so $100m of income offset by $100m of loss carryforwards STIKEMAN ELLIOTT LLP SLIDE 20

22 Reducing the Hit - comparison standard result > $100m of debt forgiveness wipes out $100m loss carryforward prepayment structure prepayment result > $100m of income absorbed by $100m loss carryforward > $50m income inclusion ($10m per year for 5 years) > $100m income deductions ($33m per year for 3 years) STIKEMAN ELLIOTT LLP SLIDE 21

23 > Reserves > Deduction for insolvent corporations > Gains on subsequent dispositions Claw-back of distributions that reduce subsequent capital gains Preservation rules where shares are transferred on a rollover basis Forgiven amount on a surrender of previously ground property STIKEMAN ELLIOTT LLP SLIDE 22

24 Timing for Insolvent Corporations > section 80 applies to losses at beginning of year pool balances immediately after settlement > in the normal course losses are used at end of the year pool balances are reduced by prior dispositions > if transferring assets out of an insolvent company, may want disposition to occur before settlement STIKEMAN ELLIOTT LLP SLIDE 23

25 > Unpaid amounts ~ 78 > Employee benefits ~ 6(1) and (15) > Shareholder benefits ~ 15(1) and (1.2) > Ordinary income ~ 9 > Seizures ~ 79 > General forgiveness ~ 80 STIKEMAN ELLIOTT LLP SLIDE 24