April 8, 2010
by Mark Walters
As economic conditions improve, some manufacturers will still face capacity and other issues that will lead to the closure of one or more of their facilities. Tax implications arising from plant closures are often overlooked. Avoid unpleasant surprises: consider the full scope of tax issues when winding-up operations. Here are some issues to consider:
1. Employees. First of all, proper notice of a plant closing to employees is required.
Due to timing and valuation assumptions, actual pension obligations may be significantly higher than the reported accounting liability, requiring additional funding. Do surpluses in pension or benefit plans have to be distributed to employees? Additional payouts, such as severance and vacation accruals may be required under collective agreements.
Take into account the applicability of various payroll taxes. Deductibility will depend on the nature and timing of the payment. Various tax planning opportunities for employees may exist.
2. Closure costs. Consider transfer pricing agreements (termination clauses, etc.) and principles, including Canada Revenue Agency (CRA) views, when determining whether a Canadian company should bear all, or some, closure costs. The deductibility of closure costs also depends on the nature of expenditure. If the closure costs are deductible, the timing of expense for tax purposes typically depends on whether a legal obligation exists and when the obligation ultimately is paid.
3. Tangible assets. Asset appraisals are often required to support valuations from a tax perspective and to provide a defense against third party claims, if any, resulting from the closure. In addition the CRA will look for supporting evidence for the valuation of properties transferred to related non-residents.
Terminal losses, if any, on scrapped assets may need to be deferred and amortized. Tax losses on transfers of assets to related parties may be restricted or may have to be deferred and amortized. Gains related to a plant closure may be taxed either as income gains (approximately 32% combined federal and provincial rate in Ontario) or as capital gains (one half of regular income rates).
Be aware of commodity tax and customs issues on the transfer of assets to other legal entities both inside and outside Canada. You may get a reduction in Municipal Property Tax on vacant properties.
4. Intangible assets. Consider the possible disposition of certain intangible assets such as customer relationships, intellectual property and manufacturing know-how. The transfer of these intangibles is likely to be considered eligible capital property disposition and taxed similar to capital gains (only 50% of the gain is taxable). Again, the CRA will want to see valuation for assets transferred across borders.