U.S. discounter Target Corp. will reap some benefits from its troubled foray into Canada that has left angry creditors with hundreds of millions of dollars of debts.
The retailer, whose Canadian division filed for bankruptcy protection on Jan. 15, will collect a $1.6-billion (U.S.) tax break in the United States as a result of its move to retreat from this country, according to a new filing.
It's a benefit that Target Canada's creditors would like to get a piece of.
"I think they should give it back to creditors," Stavros Gavrilidis, a pharmacist at the Target store in Windsor, Ont., said in an interview. He's a representative of the retailer's franchised pharmacists who estimate they're owed hundreds of thousands of dollars by Target Canada.
Creditors are pushing to find ways to recover their losses from Target's collapse. Now, amid signs the retailer itself may be the biggest beneficiary of the eventual payouts, the disclosure of the tax break has raised further concerns in the insolvency process.
When Target Canada filed for court protection, its parent company said it would give priority to other unsecured creditors for $3.1-billion (Canadian) of its debt. But another debt – of $1.9-billion – subsequently surfaced in the proceedings which makes a property firm of Target Canada its single biggest creditor.
In its annual report, filed late last week, parent Target Corp. disclosed it will collect the $1.6-billion (U.S.) tax break.
"We have recognized a tax benefit of $1.6-billion in discontinued operations, which primarily relates to the loss on our investment in Canada and includes other tax benefits resulting from certain asset write-offs and liabilities paid or accrued to facilitate the liquidation," it says.
"We have realized the majority of these tax benefits in the first quarter of 2015 and expect to realize substantially all of the remainder in 2015."
The latest disclosure of the tax break doesn't sit well with creditors.
"For Target USA this is good business, as far as its shareholders are concerned," said Melvyn Solmon, a lawyer at Solmon Rothbart Goodman LLP who represents ISSI Inc., a baby goods supplier. But for vendors, it's difficult to find out that Target is potentially making a gain "on the backs of Canadian suppliers and the Canadian economy," he said.
Suppliers, who are owed an estimated $400-million (Canadian), are trying to get back the value of the goods they shipped in the 30 days before the filing, arguing that Target benefited from the timing of the filing. The suppliers will try to convince Target to subordinate its $1.9-billion property debt to other creditors.
Mr. Gavrilidis said it's "unbelievable" that Target could benefit from a U.S. tax break given all the difficulties it is causing in Canada. He said many of the pharmacists are in a precarious situation, being forced out of their Target stores by March 30 without having finalized alternative plans. The pharmacists' group will ask the Ontario Superior Court for an extension to stay in some of the stores, which are to close by mid-May.
"To them, we're a distraction," Mr. Gavrilidis said. "You're talking about people's livelihoods."
Target posted a pretax impairment loss and other charges of $5.1-billion (U.S.) in its fourth quarter as a result of pulling the plug on its Canadian operations. It posted after-tax losses of almost $4.1-billion for its business here.
Target Canada revealed in court filings this week it considered strategic options, including leaving Canada, as early as last September. A month later, it seriously mulled winding down its 133 stores here, court documents say.
Lawyers for suppliers say they will exercise the right the court has granted them to cross-examine Target Canada's legal counsel on a host of matters.