Presented by: Matt McCulloch H. Michael Dolson

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1 Presented by: Matt McCulloch H. Michael Dolson To begin it is important to start by confirming that CRA is the most dangerous creditor in insolvency situations for the following reasons: Highly sophisticated DOJ = legal counsel (if needed) Access to information Interested creditor More power and rights than any other creditor in most situations. 2

2 Generally there are 7 ways to deal with CRA: 1) Do Nothing (pay the debt or not) 2) Dispute the debt/refile 3) Informal Arrangement with CRA 4) O.P.D (Individuals only) 5) Proposal (Individual or Corporation) 6) Bankruptcy (Individual or Corporation) 7) CCAA (Corporations only) 3 For the purposes of today s presentation, I will focus on discussing options 3 through 7 in further detail. 4

3 Informal Arrangements with CRA Basically pay what you owe plus interest and penalties. No negotiation on amount owed. Can be over time/otherwise. Exception taxpayer relief program. May involve refiling/other actions. 5 O.P.D. (Orderly Payment of Debts) Pay what is owed to a certain time (including penalties and Interest) over time interest limited to 5%. Individuals only not applicable for corporations Limited Application small debts Severely Damages credit rating Examples 6

4 Proposals Essentially involves a compromise or settlement agreement between debtor and creditors not just CRA. Preferred by CRA, courts over bankruptcy should seriously be considered in all cases involving CRA as a significant creditor. Companies use if viable Individuals use if strong income or other reasons. Two Types of Proposals under BIA: Consumer Proposals and Division One Proposals. 7 Consumer Proposals vs Division One Proposals Consumer Proposals Individuals only Debts excluding residence < $250,000 Simpler than Div. 1 and no automatic bankruptcy Division 1 Individuals or corporations Debts excluding residence (individuals) > $250,000 More complicated than consumer Automatic bankruptcy if rejected by creditors or court Automatic bankruptcy if fail to file/meet certain deadlines/annulled. 8

5 Bankruptcy Essentially debt gets extinguished upon discharge from bankruptcy subject to certain conditions/asset realizations. If Corporate company not viable. Consumer vs corporate Discharge for consumer, not for corporate Length of time consumer Length of time corporate Position of the courts - individuals 9 CCAA (Companies Creditors Arrangement Act) Similar to Div. 1 proposal (i.e. settlement with creditors) but more flexible. Company has potential to be viable. Corporations only. Debts > $5 million. Expensive, complex, court driven process. 10

6 High level overview of CRA s debt in Proposals, Bankruptcy, and CCAA Deemed year end on the day prior to bankruptcy/proposal/ccaa filing. Corp taxes = unsecured creditor GST = unsecured creditor Source deductions = deemed trust and unsecured Deemed trust = property claim (ahead of almost everyone) 11 Stay of Proceedings Effect on CRA EHTP CRA 224(1.2) ITA - cannot issue in Div. 1 proposals or CCAA unless proceedings/stay terminates. Examples and discussion ERTP CRA 224 (1.2) ITA CRA CAN continue to issue in bankruptcy no stay! Examples and discussion 12

7 BIA and CCAA Specific Provisions - Source Deductions: Amounts owed must be paid within 6 months of court approval (unless Crown consents otherwise). No approval if Crown demonstrates to court that default has occurred on any remittance due after Proposal/CCAA 13 Proposals/CCAA proceedings can include terms to deal with/compromise the following: Director s liabilities (statutory debts only) Debt forgiveness implications Corporate bankruptcies do not alleviate a director s responsibilities to CRA/otherwise. S. 160 (ITA) assessments not prevented 14

8 When does it not make sense for company/individual to file proposals/bankruptcy etc.? Individual: Life expectancy Income/assets/ family situation Debt level Repeat filing Corporate: Minimal assets Secured creditors Who pays the costs? 15 Turn it over to Mike to discuss the tax related issues 16

9 Important for tax purposes to distinguish between bankruptcies, CCAA, proposals, OPDs and informal arrangements. Some tax consequences only arise upon bankruptcy, notwithstanding that, in some cases, they are governed by the same legislation. In other cases, tax consequences turn on insolvency generally, or may be more favourable if the debtor is bankrupt and not only insolvent. 17 Effect of bankruptcy on corporations under subsection 128(1): Trustee and estate in bankruptcy disregarded, and income of bankrupt corporation computed as though estate in bankruptcy did not exist; Deemed year-end immediately prior to bankruptcy; Trustee is jointly and severally liable for tax payable in a year after bankruptcy; Corporation is deemed to not be associated; and If a discharge is granted, all pre-discharge losses are non-deductible. Trustee obligated to file returns: subsections 150(3) and 159(1). 18

10 Effect of bankruptcy on individuals substantially similar, HOWEVER: Taxation year does not end for purpose of deferred plans, which retain calendar year base; Trustee only has to file return for individual as though individual s only income was income arising from trustee s actions, without access to credits; Individual has to file separate return for income tax is not part of the estate; No post-discharge charitable donation credit allowed for gifts made prior to bankruptcy; and Undeducted pre-bankruptcy ABILs do not count against cumulative gains limit. 19 Foreclosure on secured property can happen with or without bankruptcy, with consequences under section 79. Applies to secured debts under mortgages, conditional sales contracts, etc., if the secured property is seized or repossessed. Debtor is deemed to have disposed of seized properties for principal balance of debt plus unpaid interest, less amounts otherwise included in income. If debtor subsequently makes payment on debt, capital loss or deduction equal to the amount paid. 20

11 Equivalent rule for creditors in section Applies to same types of debts and debtors. Creditor deemed to have acquired seized properties for cost of debt proceeds plus undeducted costs of enforcement, less any reserves in relation to debt. Creditor deemed to have disposed of debt at its cost amount, and generally reacquires any outstanding portion for nil proceeds. 21 Debt forgiveness: section 80. Applies to the compromise of a commercial debt obligation, to the extent of a forgiven amount. Various supporting rules for determining how much was paid in satisfaction of a cancelled debt. If a forgiven amount arises, certain tax consequences arise in order until entire forgiven amount is applied: Grind to non-capital losses; Grind to capital losses; Grind to tax attributes of debtor s property; and Income inclusion for remainder. 22

12 Debt parking: subsections 80.01(6) (8). Applies to debts that have been purchased for less than face value from an arm s length creditor. Potential problem if debt purchased for less than 80% of face value of debt, or if subsection 50(1) election made by non-arm s length creditor. If debt parking occurs, debt is deemed to have been settled upon payment by debtor equal to amount paid to acquire debt. 23 Reserves and deductions for subsection 80(13) inclusions upon insolvency: sections Section 61.2 provides for an indefinite reserve for individuals (other than trusts) based on income. Subsection 61.3(1) permits a deduction for insolvent corporations based on a formula. Subsection 61.3(2) provides for a reserve for nonresident corporations based on a formula. Section 61.4 provides for a reserve for resident corporations and trusts or non-residents carrying on business in Canada through a PE. 24

13 Transfers of property: section 160. Applies if tax debtor has transferred property, directly or indirectly, to spouse, minor child or non-arm s length person. Transferee of property is jointly and severally liable for transferor s tax debt to the extent of the lesser of: Excess of FMV of property received over amount paid to transferor; and Total tax liability of the transferor at the time that the transfer was made. No time limit on assessment: subsection 160(2). CRA can assess transferee even if transferor s debt extinguished via bankruptcy or reduced via proposal. Exception for certain matrimonial settlements. 25 Directors liability: sections and 323. If a corporation fails to remit payroll withholdings, Part XIII tax or net tax (GST ITCs), directors may be jointly and severally liable. Directors generally cannot be assessed unless claim against the corporation is unenforceable. Due diligence defence if directors made reasonable efforts to prevent the failure to remit. Limitation period: CRA must assess within two years of date that individual ceased to be a director. 26

14 Litigation issues to consider: Filing Notice of Objection or Appeal usually stays collection, but not for certain income tax debts or GST. Also possible CRA will seek a jeopardy order if there are signs of financial distress. Upon bankruptcy, all rights (including appeal rights under the Act and ETA) vest in the trustee. Automatic stay of any litigation, and generally only the trustee can continue existing litigation. 27 Now back to Matt to discuss recent experiences 28

15 Recent Experiences with CRA: Proposals: Still high success rates if reasonable No waiver of 6 month repayment provisions for source deductions Mandatory compliance terms (monitored by CRA examples) Offer amounts increasing to be accepted due to new BIA regulations etc. 29 Recent Experiences with CRA, continued: Bankruptcy: Individuals s (1) BIA: automatic court appearance if PIT debt > $200,000 and if PIT = 75% or more of proven claims. CRA almost always appears. Individuals CRA often objects otherwise depends on level of debt and relationship between CRA and debtor. Court not tax debtor friendly avoid if possible. 30

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