Value Vil­lage in $30.45M tax dis­pute

U.S.-based re­tailer ap­peals CRA’s claims it failed to pay re­quired amounts for 2012

Calgary Herald - - FINANCIAL POST - GE­OFF ZO­CHODNE Fi­nan­cial Post gzo­[email protected]­tion­al­post.com Twit­ter.com/Ge­of­f­Zo­chodne

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.

WAYNE CUDDINGTON/FILES

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.

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