October 07, 2011

Her Majesty the Queen (Appellant) v. Carma Developers Limited (Respondent)

96 DTC 6569
Federal Court of Appeal
October 15, 1996

(Court File No. A-449-96.)

Settlement or extinguishment of debts — Under court-approved plan, corporate taxpayer’s creditors assigning to taxpayer’s parent the unsecured portion of taxpayer’s indebtedness owing to them — Whether taxpayer’s debts thereby “settled” or “extinguished”, resulting in application of section 80 of the Act to reduce taxpayer’s various non-capital losses, net capital losses and other tax balances — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), s. 80(1).

On January 31, 1986, the Court of Queen’s Bench of Alberta approved a plan worked out with the taxpayer’s creditors under the provisions of the Companies’ Creditors Arrangement Act. Under the terms of such plan (“the plan”) the taxpayer’s three classes of creditors assigned to the taxpayer’s parent corporation, CL, the unsecured portion of the indebtedness owed to them by the taxpayer. The Minister assessed the taxpayer for 1988 on the basis that, by virtue of the plan, its debts had been “settled or extinguished” within the meaning of section 80 of the Act. As a result, the taxpayer’s net capital and non-capital loss carry-forwards, as well as the capital cost of its depreciable property and the adjusted cost base of its non-depreciable capital property were all reduced. The taxpayer’s appeal to the Tax Court of Canada was allowed. In essence, the Tax Court concluded that the taxpayer’s debts had continued in existence under the terms of the plan, and hence could not be considered, at law, as having been “settled or extinguished” within the meaning of section 80 of the Act. The Minister was ordered to reassess accordingly. The Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was dismissed. The Tax Court judge had made no reviewable error. There was evidence to support his findings and it was not possible to say that his decision was the result of a palpable and overriding error.