On the evening of October 31, 2006, the federal government's
"Halloween surprise" ended the favourable tax treatment
formerly afforded to income trusts. The new tax rules come into
effect in 2011. As a result, many income trusts are now in the
process of converting into corporations ahead of the deadline.
A number of such conversions have been accomplished by means of
plans of arrangement under the Canada Business Corporations
Act (CBCA) or provincial equivalents. The flexibility
of arrangement provisions makes them particularly well suited for
conversions, which are often highly complex transactions.
Yet there had been a lagging doubt about the propriety of this
approach: could a corporate statute really be used to
effect a fundamental change to a trust?
This doubt has now disappeared. In Re Acadian Timber Income
Fund, 2009 CanLII 72057, Justice Sarah Pepall of the Ontario
Superior Court of Justice (Commercial List) tackled the question of
whether section 192 of the CBCA (the plan of arrangement
provision) can be used to effect an exchange of securities
involving an income trust. Her answer was a clear
Justice Pepall noted that the word "arrangement" in
Section 192 is "to be given its widest character, limited only
by the corporation's own by-laws or general legislation"
and that "the purpose of an arrangement is to provide a
flexible mechanism that can be adapted to the needs of a particular
case." She then quoted her former colleague, Justice James
Farley (who, of course, has been our colleague at the firm since
his retirement from the bench): Justice Farley wrote, in Re
Fairmont Hotels & Resorts, 2006 CanLII 57092, that
"It is an error to forget that the very flexibility of the
arrangement provision was designed to allow the solution of
difficult and awkward situations."
Noting that not all of the applicants before her were
CBCA corporations, Justice Pepall concluded that the
arrangement provisions should be available to all the applicants.
"It seems to me that the current income trust conundrum is the
sort of exceptional situation contemplated by the dicta in Re
Fairmont. Assuming that there is compliance with the
provisions of the trust deed (a fact that should be addressed at
the approval hearing), there is no apparent prejudice to
Justice Pepall's decision is, as she herself noted,
consistent with a well-established practice of using arrangement
provisions to convert income trusts, with courts in at least four
provinces (British Columbia, Alberta, Ontario and Québec)
having allowed such arrangements to proceed. Yet few courts have
expressly considered the propriety of the practice in the way
Acadian Timber has. It is therefore a welcome judicial
seal of approval on the practice.
McCarthy Tétrault Notes
The practice of using plan of arrangement provisions to convert
income trusts into corporations — widely followed, but up
until now rarely commented on in the case law — has now
received full judicial approval. Any lingering doubts about the
propriety of the practice have disappeared, with the only
limitation being that at least one of the applicants in the
proceeding must be a corporation incorporated under the statute in
question. Given the flexibility of arrangements, and how well
suited they are for such complex conversions, this is a welcome
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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