Another former income trust shakes hands with the taxman

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Another former income trust has settled with Canada Revenue Agency over the tax consequences of its conversion to a corporation. Ag Growth International Inc., a grain handling equipment maker that converted in June, 2009, said it has entered into an agreement with CRA that "will not give rise to any cash outlay" but will result in a non-cash charge as it writes down the the value of its deferred tax assets.

Ag Growth is at least the fourth former trust to have made similar deals in recent months – Exchange Income Corp., Bonterra Energy Corp. and Colabor are the others. They had all originally believed they could use tax losses acquired when they were income trusts from the purchases of certain businesses to offset their taxes payable. But after they converted to corporations, the feds went after an estimated 10 to 20 of them, accusing them of tax avoidance.

One former trust has chosen to fight: Superior Plus Corp., which has taken the feds to Tax Court to dispute reassessments to past tax bills that could leave it stuck paying more than $80-million in back taxes. The dispute centres on a 2008 transaction in which Superior picked up $1-billion in tax losses from Ballard Power Systems Inc. it could use to offset future taxes from its profitable Canadian operations. Ballard got $46-million in return.

Under Canadian tax law, companies can't use tax losses acquired when they purchase assets in unrelated businesses. Income trusts didn't face the same restrictions because they weren't legally corporations, but those income trusts that have settled would rather lock in a resolution now than face the uncertain outcome of taking their cases to the courts. Superior by contrast, is much larger and more profitable than many trusts and probably won't take a debilitating hit even if the court rules against it.

For Winnipeg-based Ag Growth, the settlement means most of its $15.8-million in deferred tax assets will be written off, resulting in up to $1.10 per share in non-cash charges, National Bank Financial analyst Greg Colman wrote Thursday in a note. "We like this settlement as it (1) removes the uncertainty surrounding the CRA challenge and (2) does not impact cash," he said.