Let’s look more at the $1 billion tax loss that is involved in the Port Hawkesbury Paper deal
You may have heard the $1 billion figure thrown around in regards to the sale of NewPage Port Hawkesbury. Exactly what is the $1 billion in tax credits? Where did it come from? And how is it being transferred?
First, let’s look at the art of buying tax losses
Corporations aren’t taxed on their profits they may post during a year. They are taxed on their cumulative profit. It might take a corporation a few years to generate a profit, so those losses that were incurred during the start-up years can be offset against future profits.
In Canada, if a corporation is sold, the tax losses can be included in the purchase, for use by the new owner, provided the company with the losses has not yet declared bankruptcy, and the purchaser will carry on a similar business.
Why does that make NewPage Port Hawkesbury attractive?
NewPage Port Hawkesbury has accrued roughly $1 billion in tax losses that could be used to offset future profits.
If you could take over the NewPage Port Hawkesbury corporation, you could generate $1 billion in profit before you would have to pay tax.
What about Nova Scotia Power’s involvement in the deal?
A mutually beneficial agreement with Nova Scotia Power could be the key to Pacific West Commercial Corp. successfully restarting and operating the mill.
Without a lower power rate, Pacific West Commercial Corp. would be no more likely to succeed than the mill’s recent two owners, NewPage and Stora Enso.
Pacific West Commercial Corp. plan was to take over NewPage Port Hawkesbury and convert the company from an unlimited liability company to a limited liability company with the name “Port Hawkesbury Paper”.
Nova Scotia Power would become a 30% equity partner in the mill and would receive a combination of preferred and common shares of Port Hawkesbury Paper.
Because of the $1 billion tax credit, the preferred shares would allow Nova Scotia Power to receive weekly tax-free preferred share dividends in exchange for providing the mill with a much lower power rate.
Nova Scotia Power owns the co-generation biomass fire boiler located next to the mill. This boiler creates thermal energy in the form of steam to generate electricity. Under the proposed partnership, Nova Scotia Power would allow the mill to self-supply and use 24% of the energy produced by the boiler to heat and operate Port Hawkesbury Paper.
What happens now that Canada Revenue Agency has denied the advanced tax ruling proposal
The Canada Revenue Agency has denied the proposed arrangement that would see Nova Scotia Power providing power to the mill in exchange for tax-free dividends.
The Province of Nova Scotia has stepped in and offered to make more of its $124.5 million funding package for the mill forgivable. Under the proposal that was rejected, the province would not have collected millions of dollars in taxes it would have been owed because of the $1 billion tax credit. Now that it was rejected, should the mill restart, the province will receive a tax income from the mill. Because this is more beneficial for the province, Nova Scotia is willing to provide more assistance.
Pacific West Commercial Corp. released a statement yesterday indicating that they will proceed with their plans to reopen the mill, but Nova Scotia Power will not be a partner.
Pacific West Commercial Corp. plans to return to the Nova Scotia Utility Review Board with an altered proposal that will reflect the absence of the tax ruling. They also indicated they will not be seeking any concessions with respect to the otherwise approved tariff.
Now remember, the lower power rate that Pacific West Commercial Corp. has been granted from Nova Scotia Power is on the condition that Nova Scotia Power receives tax-free dividends, with no risk for any consequences, including tax consequences.
Without this arrangement, why would Nova Scotia Power continue to offer drastically reduced power to the mill?
What happens if Nova Scotia Power withdraws its support?
Without a drastically reduced power rate, Pacific West Commercial has said it would be nearly impossible to generate a profit at the Port Hawkesbury mill.
“Unless the Port Hawkesbury mill can become a very low-cost operation, it simply will not succeed,” said Ron Stern of Stern Partners, the parent company of Pacific West Commercial Corp.
If Nova Scotia Power withdraws its lower power rate, as it explicitly said it would without the advanced tax ruling, what happens to the mill?
The court appointed monitor of NewPage Port Hawkesbury’s creditor protection period, Ernst & Young, has indicated in its regular monitor reports that they have been negotiating a back-up sales agreement should the going-concern sale to Pacific West Commercial Corp. not occur. This back-up sale would most likely be for a quick liquidation of the mill’s assets.
So what do you think? Will the sale of the mill proceed? Will some other arrangement be quickly made to benefit Nova Scotia Power, keeping them interested in providing low cost power for the mill?
- No special power deal being offered to Pacific West Commercial Corp.
- Canada Revenue Agency rejects Pacific West Commercial Corp's tax deal
- Deal is dead. Pacific West Commercial Corp. will not be taking over NewPage Port Hawkesbury
- Nova Scotia Premier announces new deal to reopen Port Hawkesbury paper mill
- Statement from Ron Stern regarding Port Hawkesbury paper mill
- Concern over Nova Scotia's final agreement with Port Hawkesbury Paper
- Port Hawkesbury Paper likely to sell newsprint machine
- Who is Ron Stern, and what are his plans for the Port Hawkesbury mill?