{"id":970,"date":"2013-11-25T17:18:46","date_gmt":"2013-11-25T17:18:46","guid":{"rendered":"https:\/\/thor.ca\/\/blog\/?p=970"},"modified":"2025-02-12T13:31:02","modified_gmt":"2025-02-12T21:31:02","slug":"tcc-applies-the-gaar-to-debt-cleanup-transaction","status":"publish","type":"post","link":"https:\/\/www.thor.ca\/blog\/2013\/11\/tcc-applies-the-gaar-to-debt-cleanup-transaction\/","title":{"rendered":"TCC applies the GAAR to debt cleanup transaction"},"content":{"rendered":"<p>In <em>Auto Parts Inc. Lecavalier v. The Queen<\/em>, 2013 CCI 310 (English version not yet available), the Tax Court of Canada (TCC) applied the general anti-avoidance rule (GAAR) to effectively re-characterize a cash share subscription followed by cash debt repayment as a direct equity-for-debt exchange \u2013 resulting in debt forgiveness. Very briefly:<\/p>\n<ul>\n<li>A US parent company (US Parent) had capitalized its Canadian subsidiary (Canco) with both equity and debt.<\/li>\n<li>The value of Canco\u2019s assets subsequently declined well below the debt: the asset value was approximately $10m; the debt (held by US Parent) was approximately $24m.<\/li>\n<li>Prior to the sale of Canco\u2019s shares to a Canadian buyer (Buyer), US Parent injected the approximate $14m shortfall in value as a further cash subscription for additional shares of Canco. Canco immediately thereafter used this cash to pay down $14m of the debt owed to US Parent. (The newly issued shares effectively had no value after this $14m debt repayment.)<\/li>\n<li>US Parent then sold to Buyer both its shares of Canco (for $1) and its $10m debt of Canco (for approximately $10m).<\/li>\n<\/ul>\n<p>The CRA reassessed Canco on the basis that the $14m share subscription and $14m debt repayment prior to the sale to Buyer were avoidance transactions under the GAAR (s. 245). Furthermore, these avoidance transactions abusively circumvented <em>both<\/em> the \u201cdebt parking\u201d rule (in s. 80.01(7)) and the \u201cshares-for-debt\u201d rule (in s. 80(2)(g)). The TCC agreed. Accordingly, the $14m share subscription and $14m debt repayment were effectively ignored \u2013 giving rise to $14m of debt forgiveness in Canco under s. 80. This forgiven debt reduced Canco\u2019s available tax attributes to zero and resulted in a 50% income inclusion for the balance (under s. 80(13)).<\/p>\n<p>Two quick additional observations:<\/p>\n<ol>\n<li>Canco argued (in part) that the transactions were structured by US Parent primarily for US tax purposes, and as such, were not avoidance transactions from a <em>Canadian<\/em> tax perspective. However, Canco failed to introduce direct evidence from either US Parent or a US tax expert in support of this contention.<\/li>\n<li>The avoidance transactions did not involve the stop-loss rule in s. 40(2)(e.1) from the <em>creditor\u2019s<\/em> perspective. In that context, an important question arises: Are pre-sale debt restructure transactions that rely on the CRA\u2019s Advance Income Tax Ruling ATR-66 (and similar transactions) affected by this decision? Such transactions generally involve a transfer of debt internally within the existing group before the share sale to an arm\u2019s length buyer. No debt forgiveness arises and the CRA sees no abuse as a policy matter. Arguably such transactions should not be affected by the decision in <em>Auto Parts Inc. Lecavalier<\/em> as a policy matter. That is, the CRA has previously accepted such transactions because the creditor does not access the inherent loss in the system (directly or indirectly). In <em>Auto Parts Inc. Lecavalier<\/em>, the creditor (i.e., US Parent) appears to have accessed the inherent loss in the system \u2013 albeit on the shares of Canco sold to Buyer. Accordingly, the decision in <em>Auto Parts Inc. Lecavalier<\/em> may well be distinguishable on that basis.<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"<p>In <em>Auto Parts Inc. Lecavalier v. The Queen<\/em>, 2013 CCI 310 (English version not yet available), the Tax Court of Canada (TCC) applied the general anti-avoidance rule (GAAR) to effectively re-characterize a cash share subscription followed by cash debt repayment&hellip;<\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[52],"tags":[],"class_list":["post-970","post","type-post","status-publish","format-standard","hentry","category-tax-blog-general"],"_links":{"self":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/970","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/comments?post=970"}],"version-history":[{"count":1,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/970\/revisions"}],"predecessor-version":[{"id":2739,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/970\/revisions\/2739"}],"wp:attachment":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/media?parent=970"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/categories?post=970"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/tags?post=970"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}