News of Note

Gerbro Holdings – Tax Court of Canada finds that offshore hedge fund investments were chosen in the main for commercial reasons (e.g., manager reputation), so that s. 94.1 did not apply

The investment guidelines governing a privately-held Canadian investment company mandated its holding up to 60% of its funds in hedge funds. Although the hedge funds in which the company invested were in low tax-rate jurisdictions, Lamarre ACJ accepted that tax deferral was not “one of the main reasons” for acquiring these investments and that there instead was an “overarching commercial reason for investing" in these funds, e.g., the reputation of the hedge fund managers – and these offshore funds were selected as being the best choices. Accordingly, those investments were not subject to the offshore investment fund rules in s. 94.1.

Neal Armstrong. Summary of Gerbro Holdings Co. v. The Queen, 2016 TCC 173 under s. 94.1(1).

CRA finds that 25% Part XIII tax applies to interest paid by a transparent ULC (held through a QSSS by an S-Corp) to the S-Corp

Where an S-Corp makes an interest-bearing loan to a Nova Scotia ULC held by it through a qualified Subchapter S subsidiary, the interest paid on the loan will not be eligible for Treaty benefits under the anti-hybrid rule in Art. IV, 7(b): the interest will be disregarded for U.S. purposes, given the fiscally transparent nature of the ULC and QSSS; whereas the interest would be regarded for such purposes if the ULC were not transparent, i.e., the hybrid status of the ULC and QSSS affects the Code treatment of the interest.

This written response is clearer than an oral response given at the 26 May IFA Roundtable, which referred to the S-Corp parent as being “fiscally transparent” and to the “interest…effectively being paid by the U.S Parent (or its members) to itself.” Thus, in contrast to the oral response, which potentially was confusing on this count, the written response is consistent with the longstanding CRA view that S Corps can qualify for Treaty benefits (assuming that, unlike this example, Art. IV, 7(b) does not apply.)

Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 9, 2016-0642131C6 under Treaties – Art. 4.

Centerra Gold to acquire Thompson Creek solely for Centerra shares

Centerra Gold is proposing to acquire all of the shares of Thompson Creek under a B.C. Plan of Arrangement in consideration solely for Centerra shares, with the acquired shares contributed immediately to a new holding subsidiary of Centerra. As there is no nominal cash or other non-share consideration, the Thompson Creek shareholders are not required to file an election form in order to receive rollover treatment - so that Centerra will have lower basis in the acquired shares. The U.S. tax disclosure indicates that the exchange is expected to be a “B” reorg (which requires that the sole consideration be shares).

The exchange ratio (resulting in the Thompson Creek shareholders holding only 8% of Centerra) reflects that Thompson Creek has U.S.$673 million of deferred revenue obligations under a gold stream arrangement for its B.C. mine, as well as U.S.$823 million of long-term debt. Centerra has renegotiated the gold stream arrangement to reduce the gold delivery obligation and create a copper delivery obligation.

Neal Armstrong. Summary of Thompson Creek Circular under Mergers & Acquisitions – Mergers – Share-for-Share.

CRA confirms that the s. 95(2)(c) rollover can apply on a dropdown of shares made to an LLC as a contribution of capital rather than for “share” consideration

FA1 transfers all of its shares of FA2 to another non-resident subsidiary of FA1, which is a non-share corporation (“FA3”), as a capital contribution, i.e. no new member interests are issued by FA3. S. 93.2(3)(a) deems FA3 to have issued shares to FA1 in respect of the transfer if the fair market value of a class of its shares (i.e., the FMV of its membership interest) is increased as a result of the transfer.

CRA noted that, as a technical matter, s. 93.2(3)(a) does not appear to go quite far enough so as to permit the particulars of the rollover formula in s. 95(2)(c) to be filled in.  However, CRA went on to find that despite these “textual challenges,” the s. 95(2)(c) rollover would be available provided that the fair market value of the membership interest in FA3 increased by the FMV of the contributed shares.

Neal Armstrong.  Summary of 26 May 2016 IFA Roundtable, Q. 10, 2016-0642101C6 under s. 93.2(3).

CRA states that it sees no substantive differences between LLCs, and LLPs and LLLPs

In its oral comments at the 26 May 2016 IFA Roundtable, CRA indicated it had finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes, but indicated that it was prepared as an administrative matter to continue accepting that an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) is a partnership if it is clear that the members are carrying on business in common with a view to profit, all members and the LLP or LLLP having been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018.

In its written response published yesterday, CRA referred to the entities’ “separate legal personality” and “the extensive limitation of liability afforded to all of their members,” and also stated:

[I]t has become widely accepted that U.S….LLCs…are properly viewed as corporations for the purposes of the Act, notwithstanding…Anson… . We see little substantive difference between LLPs, LLLPs and LLCs governed by the laws of the states of Florida and Delaware.

24 other states provide for LLLPs or LLPs.  CRA stated:

We suspect that much of this reasoning may be applicable in respect of entities of other states of the U.S. and perhaps other foreign jurisdictions… .

Neal Armstrong.  Summary of 26 May 2016 IFA Roundtable, Q. 1, 2016-0642051C6 under s. 96.