winding up powerpoint.v2

Voluntarily Winding-up and Dissolving in Nova Scotia

A broad overview of applicable provisions in the Companies Act (Nova Scotia), the Societies Act (Nova Scotia), the Canada Business Corporations

Act (Canada) and the Income Tax Act (Canada)

Christian Weisenburger Law, Inc.

OUTLINE

RationaleIncome Tax Act TreatmentCorporate Law Procedure


introduction

• “winding-up” vs. “dissolution”• voluntary

– note s.136 Companies Act dissolution (see paper)• solvent vs. insolvent• amalgmation may not be available

– Quebec corporations effectively cannot be amalgamated with corporations in other jurisdictions

– Nova Scotia societies cannot be amalgamated


rationale

• loss mismatch (under Income Tax Act)• simplification • cost reduction• business end

– once the business of an entity has ceased, its assets have been disposed of, and/or its opportunities have all been realized upon, it may have no further utility

INCOME TAX ACT TREATMENT


distribution of property

Dividend treatment?

Deemed Proceeds?(with respect to distributed property)

Proceeds treatment?(for cancelled shares)

Tax Cost to Shareholder(with respect to distributed property)

1

2

3


SCENARIO 1 Dividend in Kind Neither applies

SCENARIO 2 No Rollover (on winding-up) s.88(2) applies

SCENARIO 3 Rollover (on winding-up) s.88(1) applies


Income Tax Act Treatment

• Significantly different treatment depending on whether:– S. 88(1) applies; or– S.88(2) applies

• Terminology– “PUC” or “paid up capital”– “ACB” or “adjusted cost base”


conditions for s.88(1) to apply

1. 90% of each class of share is owned by single shareholder (the “Parentco”)

2. the Parentco and WindupCo are “taxable Canadian corporations”3. Minority shareholders (“Minority”) are all at arm’s length with

Parentco4. anti-avoidance rule (s.69(11)) does not apply5. actually wound-up (within short amount of time from resolution)

SCENARIO 3 – conditions are assumed to be met


conditions for s.88(2) to apply

1. the conditions in S.88(1) are not met2. actually wound-up (within short amount of time from resolution)3. at least “substantially all” of the property of WindupCo must be

distributed to shareholders

SCENARIO 2 – conditions are assumed to be met


Neither s.88(1) nor (2) apply

1. Less than “substantially all” of the property of WindupCo has been distributed to shareholders– e.g. multi-step winding-up (occurring over too long of a period of time to

be considered the same series of transactions)

2. The conditions in S.88(1) are not met

SCENARIO 1 – assumed that property is transferred as a dividend in kind

WINDUPCO’S TAX TREATMENT

Will WindupCo realize capital gains, etc. on the disposition (or deemed disposition) of its assets?


neither s. 88(1) nor (2) appliestreatment of disposition by WindupCo

SCENARIO 1 – DIVIDEND IN KIND


s. 88(2) appliestreatment of disposition by WindupCo

SCENARIO 2 – WINDING-UP WITHOUT ROLLOVER


s. 88(1) applies:WindupCo Treatment (with respect to property distributed to Parent)

SCENARIO 3 (parent) – WINDING UP WITH ROLLOVER


s. 88(1) applies:WindupCo Treatment (with respect to property distributed to Minority)

SCENARIO 3 (Minority)

SHAREHOLDER TAX TREATMENT

When assets of WindupCo are distributed to a shareholder on winding-up:

(i) what portion, if any, of such received assets must be recognized as a dividend by the shareholder? and

(ii) what portion, if any, of such received assets must be recognized as proceeds of disposition for shares cancelled, or to be cancelled, on dissolution?


neither s. 88(1) nor (2) appliesshareholder treatment



s. 88(2) appliesshareholder treatment



s. 88(1) applies:Parent corporation Treatment



s. 88(1) applies:Minority Treatment

SCENARIO 3 (Minority)

COST OF ASSETS (TO SHAREHOLDER)

What will the cost of the assets received by the shareholder be for tax purposes (given that the lower that such cost is, generally the greater the eventual capital gain to the shareholder when disposed of by the shareholder in the future)?


neither s. 88(1) nor (2) appliescost amount to shareholder



s. 88(2) appliescost amount to shareholder



s. 88(1) appliescost amount to shareholder



Aggregate amount of s.88(1) “bump” available

HIGH ACB

Analogy: the bump available is roughly the amount by which the egg is bigger than the chick

ACB of (cancelled) shares

ACB of “net” assets(distributed to Parentco)

“bump”available“chick”

“egg”

Determined under s. 88(1)(d)(i) (and modified by s.88(1)(d)(i.1))



CEILING FMV of eligible propertyat the time that Parentco acquiring “control” (e.g. 50%+ voting rights) of WindupCo

IRRELEVANT FMV of eligible property CURRENT

ACB bump

Once the ceiling is reached, remaining “bump” pool cannot be used (i.e. wasted)

ACB Immediately before winding-up If the amount of bump available is less than

the ceiling, Parentco can pick and choose which eligible properties receive the bump

“Bumping” up particular assets to the available ceiling



“ineligible property” to receive bump: 88(1)(c)(iii)-(vi)

The ACB of depreciable and other “ineligible property” (see tests in 88(1)(c)(iii)-(vi)) distributed to Parentco cannot be “bumped” up

1. depreciable property2. property held as inventory (i.e. not held as

capital property)3. property that is in excess of safe income as

described in s.55(2)4. boomerang property: property previously

owned by Parentco (or person not at arm’s length with Parentco)

5. parking scheme: property sold back to previous owner

In some (or all) circumstances, the following property is “ineligible property”:



Income Tax Act Summary


non-capital Losses of WindupCo

• deductible by Parentco in tax year following winding-up (s.88(1.1))– Tip: ensure that winding-up occurs before tax year end of Parentco (to

start the clock quicker)

Dec 2008 Dec 2009

YEAR END FORPARENTCO

YEAR END FORPARENTCO

Before end of 2008

WINDING UP OF WindupCo

Parentco CANNOT yet claim WindupCo’s losses as its own

Parentco CAN claim WindupCo’s losses as its own

CORPORATE LAW PROCEDURE

Companies Act (Nova Scotia)Canada Business Corporations Act (Canada)Societies Act (Nova Scotia)


procedure


• tax planning (e.g. to qualify for s.88(1))– buying out minority– minimizing property transferred to Minority– reducing PUC

• reviewing agreements– assignment provisions? fees? consent?

• other taxes– HST generally not applicable – s.272 ETA– deed transfer?


• vote passed by each class required (whether or not class ordinarily has right to vote)

• 2/3 or 75% majority required, depending on the statute (see paper)

• Minority has oppression rights


• dispositions of the assets – e.g. by sale, gift or distribution – e.g. to the members or other persons

• conveyance documents and agreements – e.g. purchase and sale agreement, bill of sale, deeds,

assignment of contracts & warranties agreement, etc.• Directors approval (or liquidator if one has been

appointed).


• application of BIA?• rights of creditors (and other interested persons)– no dissolution if any liabilities: CBCA, Societies Act– such persons must give consent, be “provided for” or

“be protected”: Companies Act• proof of protection– statutory declaration: companies– financial statements and statement in petition:

societies– n/a: CBCA


• liability of members (limited to assets received)– 1 yr: Companies Act– 2 yr: CBCA

• assumption of liabilities by shareholders– beneficial treatment to shareholders via CRA

interpretation– cannot be directly enforced by creditor: Markborough

Properties Ltd. v. Dartmouth (NSSC, 1989)• S.159 Income Tax Act Clearance Certificates• contributories if shortfall


• assets distributed to members in accordance with their respective entitlements


• Companies– Advertisement by company in 2 month to 2 week

window (before submitted petition) in:• Royal Gazette, and• Local newspaper

• CBCA– Done after certificate of dissolution is issued by

Director• Societies– Not required


• companies: file with registrar– petition– original newspaper advertisement (or affidavit in lieu)– certified copy of shareholders resolution– affidavit as to, e.g., protection of creditors

• CBCA: file articles of dissolution• societies: file with registrar– petition– financial statements evidencing no liabilities– certified copy of resolution

CONTACT

Christian WeisenburgerChristian Weisenburger Law, Inc.(902) 412-1461

[email protected]

winding up powerpoint.v2

Business

parent winding

property of windupco

tax cost

cost of assets

windupco treatment

received assets

tax purposes

following property