5 October 2012 APFF Roundtable, 2012-0454231C6 F - Garantie pour impôt de depart
Principal Issues: In hypothetical situations, can the CRA confirm that the proposed security could be adequate?
Position: 220(4.5)
Reasons: The Act
Federal Tax Roundtable, 5 October 2012
2012 APFF Conference
Security for departure tax
Subsection 220(4.5) allows an individual to defer the payment of the departure tax by providing adequate security. The Explanatory Note to subsection 220(4.5) states that:
The provision requires the Minister of National Revenue to accept "adequate security." The adequacy of any particular proposal for security is a matter of fact. It is understood, however, that in respect of tax on a gain from the deemed disposition of shares of a corporation, the Minister will not exclude the possibility of accepting some or all of the shares as security.
It is apparent from this Explanatory Note that the Minister must consider the facts of each case when determining whether or not all the shares are required as security.
Questions to the CRA
a) In the following hypothetical situation (Scenario 1), can the CRA confirm that it will not consistently require the totality of shares to secure the departure tax and that it will consider all of the facts?
Mr. X emigrates from Canada. At the time of his departure, he holds 100 Class A shares of a Canadian private corporation with a fair market value ("FMV") of $5 million. The departure tax that is payable in this regard is $1 million.
In addition, the procedures manual for the CRA's Migration Accounts Program states that the shares of a Canadian private corporation are acceptable security to the CRA only in the case of the shares that generated the departure tax.
b) In the following hypothetical scenario (Scenario 2), can the CRA confirm that the proposed security could be adequate and that the CRA will consider all the facts? If this is not the case, can the CRA indicate why this security would be consistently found to be unacceptable?
Mr. X emigrates from Canada. At the time of his departure, he holds 100 Class A shares and 100 Class B shares of a Canadian private corporation with a FMV of $5 million for the Class A shares and $10 million for the Class B share. The departure tax payable is $1 million with respect to the Class A Shares and $2 million with respect to the Class B Shares. Mr. X proposes to hypothecate the Class B Shares as security for all of the departure tax resulting from the deemed disposition of the Class A and Class B Shares.
Finally, if the Minister determines at any time that the security accepted under subsection 220(4.5) is not adequate, subsection 220(4.53) provides that the security shall be considered after the particular time to secure only the amount for which it is adequate security at the particular time, the balance being unsecured. When the taxpayer’s shares of a Canadian private corporation are hypothecated, the taxpayer signs a movable hypothec with delivery to the CRA. The CRA model agreement provides the following clause:
3.11 In the event that all of the hypothecated shares are redeemed by the Company, at the request of the Corporation or of the taxpayer, during the term of this Agreement, the Taxpayer hereby agrees that the indebtedness will, at the time of such redemption, become immediately due and payable. In the event that, during the term of this Agreement, such a redemption, at the request of the Corporation or the Taxpayer, applies to only a portion of the Hypothecated Shares, the Taxpayer hereby agrees that the portion of the debt corresponding to the proportionate value of the redeemed Hypothecated Shares in relation to the value of all of the Hypothecated Shares, including the portion thereof that is was subject of the redemption, will then become, at the time of such redemption, immediately due and payable.
c) Can the CRA confirm that this agreement mechanism it has put in place for a partial redemption of the shares hypothecated as security is consistently applied by it? Could the CRA avail itself of section 220(4.53) to override the agreement that it signs with the taxpayer to require full payment (or a larger portion than provided for in clause 3.11) of the departure tax despite a partial redemption of the shares? If so, does the taxpayer have recourse against the CRA for breach of its contractual obligations?
d) Does the CRA intend to issue guidelines in the near future on what it considers acceptable as adequate security within the meaning of subsection 220(4.5)?
CRA Response
Response to Question (a)
In Scenario 1, the practice of the CRA is to require all the Class A shares as security even if their value more than covers all of the debt.
Response to Question (b)
In Scenario 2, the practice of the CRA is to require all the shares of the two classes held by Mr. X as security. We consistently prefer and request all the shares of private corporations. If for some reason, the taxpayer can only provide the Class B shares, a valuation must then be made. If there is sufficient equity to cover the debt on a 2:1 ratio, the CRA will accept the shares as security.
Response to Question (c)
On a partial redemption, the portion of the debt that is still secured by hypothec of the shares is not consistently subject to a demand for payment in full. The shares provided as security secure only the amount in question at the time of the provision of the security. If the Minister determines that, as a result of such partial surrender, the security accepted in accordance with subsection 220(4.5) is not sufficient, the Minister may request additional security within 90 days of the partial disposition of the hypothecated shares or the full payment of the debt as provided in subsection 220(4.53). The same applies to shares traded on the stock market whose market value has fallen below a certain threshold. Where additional security is provided, the Minister is deemed to have accepted it under subsection 220(4.5).
Response to Question (d)
The CRA does not expect to publish guidance on the security for departure tax provided for in subsection 220(4.5).
Anne Dagenais
(613) 957-2121
2012-045423