Principal Issues: Whether the deemed year-end provisions of paragraph 128(1)(d) of the Income Tax Act apply where a corporation that is not a bankrupt has made a proposal to its creditors.
Position: No, since the taxpayer is not a bankrupt, provision of paragraph 128(1)(d) does not apply.
XXXXXXXXXX 2007-024360 S. Grégoire (613) 957-2746 October 10, 2007
Dear Sir,
Subject: Proposal - paragraph 128(1)(d) of the Income Tax Act
This is in response to your letter of July 3, 2007, in which you asked whether the provisions of subsection 128(1) of the Income Tax Act (the "Act") apply when a proposal has been confirmed by the Superior Court.
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
The Facts
Opco was incorporated in the year XXXXXXXXXX. Its fiscal period ends on XXXXXXXXXX of each year.
On XXXXXXXXXX, Opco submitted a proposal to its creditors under the rules provided under the Bankruptcy and Insolvency Act ("BIA").
This proposal was accepted by all the creditors, approved by the inspectors and homologated by the Superior Court. Each of the creditors was paid according to the terms of the proposal.
Question
You wish to have the Canada Revenue Agency (the "CRA") confirm your position that the provisions of subsection 128(1) do not apply to this situation. Your position is based on the fact that although Opco was insolvent within the meaning of the BIA, it was never a bankrupt within the meaning of the BIA. As such, its fiscal year would always end, without interruption, on XXXXXXXXXX of each year.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the CRA's practice not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Section 128(1) applies where a corporation is bankrupt. Since this term is not defined in the Act and the term "bankrupt" adopts the definition given to it in the BIA, we must rely on the provisions of the BIA to determine whether a corporation making a proposal is bankrupt for the purposes of subsection 128(1).
BIA subsection 50(1) provides that both insolvent persons within the meaning of that Act and bankrupts may make a proposal. In doing so, it is important to determine whether the company making the proposal was technically a bankrupt.
In your statement of facts, you stated that Opco is an insolvent person within the meaning of the BIA. Section 2 of the BIA specifically states in the definition of "insolvent person" that such a person is not bankrupt. Accordingly, it is our view that Opco is not a bankrupt corporation for the purposes of subsection 128(1).
From this, we conclude that the provisions of paragraph 128(1)(d) cannot be applied in the situation presented.
Nevertheless, we would like to draw your attention to the fact that this interpretation was tested before the Tax Court of Canada in Jacques V. Marchessault v. The Queen, 2006 DTC 3468. The Court took a liberal approach in interpreting the term "bankruptcy" in subsection 128(2), concluding that the term "bankruptcy" implicitly referred to a "proposal". However, the CRA appealed this decision to the Federal Court of Appeal.
We hope you find our comments of assistance and thank you for bringing these issues to our attention. Should you require any additional information regarding this matter, please do not hesitate to contact us.
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.