Voluntarily winding up and dissolving a corporation or society involves several steps under corporate and tax law. Under the Income Tax Act, winding up can qualify for tax-deferred treatment under section 88(1) or 88(2), depending on ownership and whether substantially all assets are distributed. For corporate entities like companies and CBCA corporations, the procedure involves shareholder approval, disposition of assets, creditor protection, and filing a petition and other documents with the registrar. Tax planning is required to optimize the tax consequences of winding up under corporate and income tax law.

1. 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.

2. outline Rationale Income Tax Act Treatment Corporate Law Procedure

3. 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

4. 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

5. INCOME TAX ACT Treatment

6. Deemed Proceeds? (with respect to distributed property) 1 2 distribution of property Proceeds treatment? (for cancelled shares) Dividend treatment? 3 Tax Cost to Shareholder (with respect to distributed property)

8. 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”

9. conditions for s.88(1) to apply SCENARIO 3 – conditions are assumed to be met 90% of each class of share is owned by single shareholder (the “Parentco”) the Parentco and WindupCo are “taxable Canadian corporations” Minority shareholders (“Minority”) are all at arm’s length with Parentco anti-avoidance rule (s.69(11)) does not apply actually wound-up (within short amount of time from resolution)

10. conditions for s.88(2) to apply SCENARIO 2 – conditions are assumed to be met the conditions in S.88(1) are not met actually wound-up (within short amount of time from resolution) at least “substantially all” of the property of WindupCo must be distributed to shareholders

11. Neither s.88(1) nor (2) apply SCENARIO 1 – assumed that property is transferred as a dividend in kind 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) The conditions in S.88(1) are not met

12. WindupCo’s tax treatment Will WindupCo realize capital gains, etc. on the disposition (or deemed disposition) of its assets?

13. neither s. 88(1) nor (2) appliestreatment of disposition by WindupCo SCENARIO 1 – DIVIDEND IN KIND

14. s. 88(2) appliestreatment of disposition by WindupCo SCENARIO 2 – WINDING-UP WITHOUT ROLLOVER

15. s. 88(1) applies:WindupCo Treatment (with respect to property distributed to Parent) SCENARIO 3 (parent) – WINDING UP WITH ROLLOVER

16. s. 88(1) applies:WindupCo Treatment (with respect to property distributed to Minority) SCENARIO 3 (Minority)

17. 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?

18. neither s. 88(1) nor (2) appliesshareholder treatment SCENARIO 1 – DIVIDEND IN KIND

19. s. 88(2) appliesshareholder treatment SCENARIO 2 – WINDING-UP WITHOUT ROLLOVER

20. s. 88(1) applies:Parent corporation Treatment SCENARIO 3 (parent) – WINDING UP WITH ROLLOVER

21. s. 88(1) applies:Minority Treatment SCENARIO 3 (Minority)

22. 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)?

23. neither s. 88(1) nor (2) appliescost amount to shareholder SCENARIO 1 – DIVIDEND IN KIND

24. s. 88(2) appliescost amount to shareholder SCENARIO 2 – WINDING-UP WITHOUT ROLLOVER

25. s. 88(1) appliescost amount to shareholder SCENARIO 3 (parent) – WINDING UP WITH ROLLOVER

26. SCENARIO 3 (parent) – WINDING UP WITH ROLLOVER Aggregate amount of s.88(1) “bump” available Analogy: the bump available is roughly the amount by which the egg is bigger than the chick “egg” ACB of (cancelled) shares HIGH ACB “bump” available ACB of “net” assets (distributed to Parentco) “chick” Determined under s. 88(1)(d)(i) (and modified by s.88(1)(d)(i.1))

27. SCENARIO 3 (parent) – WINDING UP WITH ROLLOVER “Bumping” up particular assets to the available ceiling IRRELEVANT FMV of eligible property CURRENT Once the ceiling is reached, remaining “bump” pool cannot be used (i.e. wasted) CEILING FMV of eligible property at the time that Parentco acquiring “control” (e.g. 50%+ voting rights) of WindupCo ACB bump 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

28. SCENARIO 3 (parent) – WINDING UP WITH ROLLOVER “ineligible property” to receive bump: 88(1)(c)(iii)-(vi) In some (or all) circumstances, the following property is “ineligible property”: depreciable property property held as inventory (i.e. not held as capital property) property that is in excess of safe income as described in s.55(2) boomerang property: property previously owned by Parentco (or person not at arm’s length with Parentco) parking scheme: property sold back to previous owner The ACB of depreciable and other “ineligible property” (see tests in 88(1)(c)(iii)-(vi)) distributed to Parentcocannot be “bumped” up

29. Income Tax Act Summary

30. 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) ParentcoCANNOT yet claim WindupCo’s losses as its own ParentcoCAN claim WindupCo’s losses as its own Dec 2008 Dec 2009 Before end of 2008 YEAR END FOR PARENTCO WINDING UP OF WindupCo YEAR END FOR PARENTCO

31. Corporate law procedure Companies Act (Nova Scotia) Canada Business Corporations Act (Canada) Societies Act (Nova Scotia)

32. procedure

33. 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?

34. 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

35. 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).

36. 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

37. 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

38. assets distributed to members in accordance with their respective entitlements

39. 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

40. 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

41. contact Christian Weisenburger Christian Weisenburger Law, Inc. (902) 412-1461 christian@beyondtheboxlaw.com beyondtheboxlaw.com