Court approves use of RVO to preserve tax losses and avoid land transfer tax

MarshallZehr Group Inc. v. 2301402 Ontario Limited et al.
Can an RVO be approved in a receivership to preserve tax losses and avoid land transfer tax?

Summary: The Ontario Court has approved the use of a reverse vesting order in a receivership to facilitate the sale of a real estate holding company while preserving valuable tax attributes and avoiding land transfer tax. The Court granted the reverse vesting order after a broad marketing process produced multiple bids but confirmed the share transaction was economically superior to asset sales, finding that the structure was appropriate because it preserved approximately $22.5 million in non-capital tax loss carryforwards and allowed the purchaser to acquire the company’s shares rather than the underlying real estate, thereby avoiding land transfer tax, while leaving no stakeholder worse off than under any alternative transaction.

TDB Restructuring Limited, as court-appointed receiver (the “Receiver”) of the assets of 2301402 Ontario Limited (the “Company”) and Jake’s House Community Residences (collectively, the “Debtors”) sought an approval and reverse vesting order (the “ARVO”), among other things, approving the subscription agreement dated February 10, 2026 (as amended, the “Subscription Agreement”) among the Receiver and Dementia Care Holdings Inc. (the “Purchaser”), and the transactions contemplated thereby (the “Transaction”) by way of reverse vesting transaction.

The Company was the legal and beneficial owner of certain real properties in Lucan, Ontario. The Receiver received four offers for the real properties, and one offer for the shares of the Company. The offer for the purchase of the Company’s shares was significantly superior to the offers received for only the real properties. The Receiver and the Purchaser entered into the Subscription Agreement, subject to Court approval, which contemplated a reverse vesting order transaction. The aggregate purchase price for the Purchased Shares of the Company was payable as follows: a) by payment of cash consideration, sufficient to pay priority payables (as defined in the Subscription Agreement; and b) the retained portion of the secured indebtedness owing to the senior secured creditor, MarshallZehr.

There was no known outstanding HST, an unsecured amount of $1,654.15 was owing in respect of payroll deductions and an unsecured amount of approximately $12,000 was owing in respect of corporate taxes. Canada Revenue Agency did not oppose the relief sought, subject to certain amendments to the draft order.

The principles to be applied when determining whether to approve a sale transaction in a receivership proceeding were articulated by the Ontario Court of Appeal in Royal Bank of Canada v. Soundair Corp. The Receiver solicited listing proposals from established commercial real estate brokerages and selected Colliers in consultation with MarshallZehr as first secured creditor. There was an extensive marketing process which canvassed the market and ultimately resulted in 72 interested parties executing confidentiality agreements and five offers. The Purchaser's offer was significantly superior to any of the other offers received. The Receiver was of the view that further marketing or an alternative transaction structure would be unlikely to result in a superior outcome and would only result in increased professional fees, which would be to the detriment of the estate.

The Court concluded that the Soundair factors were satisfied, and went on to consider the factors for determining whether a proposed reverse vesting transaction is appropriate per Harte Gold Corp. (Re): (i) whether the reverse vesting order is necessary; (ii) whether the reverse vesting transaction structures produces an economic result at least as favourable as any other viable alternative; (iii) whether any stakeholder is worse off under the reverse vesting transaction structure than they would have been under any other viable alternative; and, (iv) whether the consideration being paid for the debtors' business reflects the importance and value of the licenses and permits (or other intangible assets) being preserved under the reverse vesting transaction structure.

Here, there were no licenses or permits to be preserved. Rather, the Transaction was designed to preserve the Purchaser's ability to maximize the tax attributes of the Company, including approximately $22.5 million in non-capital loss carryforwards. In this respect, based on certain changes made to the requested ARVO, CRA did not raise any opposition. As an added benefit, the structure of the Transaction permitted the Purchaser to acquire shares of the Company (which does not attract land transfer taxes) rather than directly acquire the Real Property (which would attract land transfer taxes).

Courts have granted reverse vesting orders where there is, among other things, a potential loss of tax attributes through a traditional approval and vesting order that would affect the purchaser’s willingness or ability to complete the transaction. Here, the Court was satisfied that the Transaction, with the reverse vesting structure, would generate the best economic result possible in the circumstances while also realizing the value of the Company’s tax losses, which would not have been possible in an asset sale. No stakeholders would be worse off under the proposed reverse vesting structure than they would be under any other viable alternative. In light of the Company’s outstanding obligations to its secured creditors, there would be no recovery for unsecured creditors under this or any alternative structure. Unsecured creditors would likewise not be expected to receive any recovery if the Transaction were completed through an asset sale rather than the ARVO.

 The Court granted the Order sought.

.Judge: Justice Dietrich

Professionals involved:

• Harvey Chaiton, Danish Afroz, Maleeha Anwar, Alex Krancevic and Liam Scanlon of Chaitons for the Court-Appointed Receiver, TDB Restructuring Limited

• Alexander Soutter and Stephanie Fernandes of TGF and Jim Elsley of McKenzie Lake for the Purchaser, Dementia Care Holdings Inc.

• Steven Groeneveld for the Ontario Ministry of Finance