By Ross Marowits, The Canadian Press

MONTREAL - AbitibiBowater's worsening financial position is forcing the insolvent company to juggle its corporate structure to avoid a big tax bill.

The Montreal-based company, which is operating under court protection from creditors, faces $55.25 million in withholding tax in Canada, and potentially more in the United States, unless it is able to repay a $250-million loan this year between its Canadian and U.S. subsidiaries.

At the time of last year's merger between Abitibi-Consolidated and Bowater, the Canadian company agreed to lend AbitibiBowater US Holding LLC $201.6 million. That amount increased to about $250 million with interest as of April's court protection.

But the U.S. holding company "does not have sufficient funds" to repay the loan this year as is required under Canadian tax law for cross-border intercompany debt, according to a monitor's report filed in Quebec Superior Court.

Creation of two holding companies would allow the debt to be paid by transferring preferred units under similar terms and conditions.

AbitibiBowater's tax issue comes as the company struggles to avoid bankruptcy in light of a dropping demand for newsprint.

The company, which reports in U.S. dollars, lost $511 million, or $8.85 per share in the third quarter. That's 69 per cent more than the $302 million, of $5.23 per share, loss a year earlier.

Sales decreased 37 per cent to $1.09 billion for the period ended Sept. 30.

In a U.S. regulatory filing, AbitibiBowater said its paper product lines "experienced significant demand declines due to trends in the newsprint industry and global economic conditions."

Abitibi's newsprint operations lost $140 million in the quarter as sales plummeted to $396 million, from $826 million a year earlier.

The other operating divisions experienced more modest sales declines. Market pulp earnings increased to $41 million from $6 million in 2008, even though revenues decreased 5.7 per cent to $147 million.

Abitibi said further capacity curtailments may be necessary in 2010 if North American newsprint demand declines or if global conditions worsen for all or its product lines.

"In our wood products business segment, we expect our 2009 operating rate to continue at extremely low levels and we will continue to take curtailment and other actions to minimize the financial impact as a result of the economic conditions," it stated.

Operating losses were cut to $33 million from $159 million a year earlier largely because of lower costs.

Manufacturing costs decreased $446 million due partially to lower volumes, favourable currency exchange and $83 million from alternative U.S. fuel tax credits.

Head office layoffs and elimination of a series of corporate expenditures helped to trim administrative costs by $29 million.

Abitibi incurred $301 million in reorganization costs during the quarter and $400 million this fiscal year. The expenditures this year include $81 million in professional fees and $162 million in charges related to indefinite and permanent closures.

It has $6.55 billion of liabilities, including $4.9 billion of unsecured debt.

During the quarter, it earned $38 million in net proceeds from the sale of about 120,000 hectares of timberlands, primarily in Quebec.

Meanwhile, Finance Minister Jim Flaherty has agreed to meet with union and company officials to discuss its $1.3-billion pension shortfall.

The Communications, Energy and Paperworkers Union and Abitibi want the federal governments to enact legislation to permit the creation of a pension trust to allow employees to obtain full pension benefits.

If the company declares bankruptcy, employees would lose some of their pension benefits.