Value Village in $30.45M tax dispute
U.S.-based retailer appeals CRA’s claims it failed to pay required amounts for 2012
TORONTO The Canada Revenue Agency and Value Village have found themselves at odds regarding the amount of taxes the thrift-store owner is obligated to pay after a private equity-backed shakeup six years ago.
Value Village Canada Inc., a subsidiary of the U.S.-based chain, lodged a notice of appeal with the Tax Court of Canada in August.
In the notice, Value Village said it had been hit with a $30.45-million reassessment by the CRA in 2017, and that the agency had invoked its general anti-avoidance rule, alleging the for-profit retailer “failed to deduct, withhold or remit tax payable by a non-resident” for 2012.
That was the year that Savers Inc., the then-parent company of Value Village, announced agreements to “recapitalize” itself with the help of two U.S. private equity firms.
Court documents show that the deal announced in 2012 was a complicated leveraged buyout that involved a number of corporate entities and the borrowing of hundreds of millions of dollars.
But in replying to Value Village’s appeal in November, the federal government alleged there had also been a series of transactions that “resulted, directly or indirectly, in a tax benefit,” namely the “avoidance” of withholding tax charged on amounts paid or credited to non-residents, such as dividends.
The same reply shows that the federal government took issue with one of the steps taken to implement the leveraged buyout.
Instead of transferring the shares of the old Value Village Canada entity to the new Canadian entity directly, they were first shifted to a U.S. LP, which was then sold to the new Canadian entity for a “consideration” of $1.015 billion in the form of two promissory notes.
The federal government said that if the shares of Value Village Canada’s predecessor had been transferred directly, the $1.015 billion would have been deemed a taxable dividend.
Inserting the U.S. LP into the deal, the government alleged, was “not necessary except for obtaining the tax benefit.”
The reply also alleged that the transactions could “reasonably be considered” to have directly or indirectly resulted in a “misuse and abuse” of sections of the Income Tax Act that it said are intended to restrict the amount of surplus and retained earnings that can be extracted from a company tax-free.
In addition to the $30.45-million reassessment, Value Village said in its notice that the CRA had also moved to reduce the paid-up capital of its common shares from $406 million to nothing, “for surplus repatriation purposes only.”
The company appealed to have the CRA’s assessment and determination vacated.
When asked for comment in November, a spokesperson for Value Village pointed the Financial Post towards the company’s tax court appeal, which disputes the CRA’s view of the transactions.
“When one reviews the reasons for implementing each of those steps, it is clear that business and U.S. tax considerations drove their implementation,” Value Village’s notice of appeal said. “The Canadian tax aspects were always subordinate to or incidental to the other objectives.”
The tax-court documents say the shares of Value Village Canada are indirectly owned by a Washington state-based holding company called S-Evergreen. The spokesperson said the overall ownership of Value Village, one of Canada’s largest retailers of used goods, is a mix of the two private-equity firms, as well as the company’s former chairman and its management.
Neither side’s claims have been proven in court at this point.
The federal government is alleging Value Village’s move to implement a leveraged buyout in 2012 resulted in “misuse and abuse” of parts of the Income Tax Act, with transactions that “resulted, directly or indirectly, in a tax benefit.” The U.S. retailer is appealing the claims.