News of Note
Glencore Canada – Federal Court of Appeal finds that a break fee was a capital receipt, but was includible under s. 12(1)(x)
Email this ContentAn integrated nickel-mining public company (“Falconbridge”), entered into merger agreements with a more junior public company (“Diamond Fields”) which, through a 75%-owned subsidiary, held a valuable deposit at Voisey’s Bay in Newfoundland. The merger agreements provided for the immediate payment by Diamond Fields of a “Commitment Fee” of $28.2 million, and for the payment of a break fee of $73.3 million (calculated to bring the total of the two fees (the “Fees”) to 2.5% of the transaction value) on the completion by Diamond Fields of any competing offer. This occurred – the offer of another public company (Inco – the 25% minority shareholder) was accepted by the Diamond Fields shareholders, thereby triggering the payment by Diamond Fields of the break fee.
In reversing the Tax Court’s finding that the Fees were income from a business and that they instead were capital receipts, Woods JA found that the Fees were received on capital account because they were linked to a proposed acquisition of a capital asset (the Diamond Fields shares).
The break fee did not qualify as proceeds of disposition of a Falconbridge right to merge, as she did not consider there to be such a right: Diamond Fields could not promise the acceptance by its shareholders of the Falconbridge offer nor could it fetter the fiduciary obligations of its board – there was no capital gain.
Woods JA concluded that the fees (less a reduction for bid-related expenses pursuant to s. 12(1)(x)(vii)) were required by s. 12(1)(x) to be included in computing Falconbridge’s income from a business or property. Among other findings:
- “Diamond Fields paid the Fees in order to entice Falconbridge to make an offer pursuant to the merger arrangements” so that it was “reasonable to consider that the Fees were received by Falconbridge as an inducement for the purposes of s. 12(1)(x)”;
- “The Fees were linked to Falconbridge’s operations as a nickel mining company”, which “required access to ore deposits” so that they were received “in the course of” those activities (a phrase which she essentially equated with "in connection with"); furthermore, “the Fees were linked to an acquisition of shares that had the capacity to produce property income” so that they were “also received in the course of earning income from property”.
S. 12(1)(x) was enacted to ensure the recognition for tax purposes of tenant inducement payments and of the relocation allowances addressed in Consumers' Gas, i.e., in connection with assets used directly in the income-generating process. The above interpretation accorded to "in the course of" earning income from a business of property suggests that the scope of s. 12(1)(x) may be broader than what initially was principally targeted.
Neal Armstrong. Summaries of Glencore Canada Corporation v. Canada, 2024 FCA 3 under s. 9 – compensation payments, s. 248(1) – property and s. 12(1)(x).
Brookfield Renewable Power – Court of Quebec reduces the deductible interest on loss consolidation loans from 14% to 8.75%
In connection with a September 2009 loss consolidation transaction between a “Lossco” in the Brookfield group (“BRPI”) and its “Profitco” subsidiary (“BEMI”):
- Two Newcos with nominal share capital were lent $2.25 billion and $0.525 billion by BRPI pursuant to unsecured demand notes bearing interest at 14%;
- Each Newco used the loan proceeds to subscribe for non-cumulative preferred shares of BRPI;
- On the same day, BEMI acquired the Newcos for a nominal amount and they were wound up into BEMI, so that BRPI held $2.275 billion of loans in its subsidiary, and BEMI held $2.275 billion of preferred shares of its parent; and
- The loans were left outstanding for approximately five months, then: BRPI declared and paid a dividend on the preferred shares to fund the payment of all the accrued interest on the loans, and those shares and loans were redeemed and repaid by way of set-off.
The ARQ assessed on the basis that interest in excess of 6% was unreasonable.
Lareau JCQ reviewed various case on the meaning of “reasonable” under ITA ss. 67 and 20(1)(c) as well as the ENMAX and Gervais Auto decisions. He also referred to the evidence of the two ARQ experts indicating that BRPI had been borrowing from arm’s length lenders at around that time at rates ranging between 6.00% and 8.75%; and to a written concession of counsel for the ARQ that an interest rate as high as 8.75% could be justified as reasonable. He then referred the appeal back to the ARQ for reassessment on the basis of allowing the interest deduction at an 8.75% rate.
Neal Armstrong. Summary of Brookfield Renewable Power Inc. v. Agence du revenu du Québec, 2023 QCCQ 10239 under s. 20(1)(c).
FOOi Inc. – Tax Court of Canada declines to treat a letter to CRA enclosing an SR&ED claim that CRA had lost as a de facto request for an extended period to object, and as an objection
The taxpayer, a CCPC, was found by MacPhee J to have filed its SR&ED claim for its taxation year ending on June 30, 2018 on a timely basis on December 20, 2019. However, CRA lost this filing and, on January 21, 2021, somewhat over a year from the date of initial assessment of the 2018 return, the taxpayer’s accountants wrote to the CRA SR&ED division, explained that no response had been received to the December 2019 SR&ED claim filing and provided a duplicate copy of the 2018 return along with the SR&ED claim. On March 8, 2021, CRA informed the taxpayer that the SR&ED expenditures claim was denied as it had been filed more than 12 months after the 2018 return was due.
The taxpayer submitted that the letter dated January 21, 2021 should be regarded as both an application for an extension of time with the Minister (as the 90-day period to file a notice of objection had elapsed) and a Notice of Objection. MacPhee J rejected these submissions as the letter was not sent to the Chief of Appeals, and it did not clearly indicate that it was intended as an application to extend time, or even as a notice of objection.
Neal Armstrong. Summary of FOOi Inc. v. The King, 2023 TCC 176 under s. 166.1(2).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released during June of 2002. Their descriptors and links appear below.
These are additions to our set of 2,688 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Procon – Federal Court of Appeal doubts that “losses incurred by disposing of property that is ‘inextricably linked’ to the ongoing operation of the business are on income account”
The appellant, a mining contractor, subscribed for shares of two junior mining companies in connection with being awarded mine development work by each company. It later realized losses on sales of those shares to a related corporation after the companies failed to proceed with the mines, which the Tax Court found to be capital losses.
Monaghan JA found no reversible errors in the following findings of the Tax Court:
[T]he shares “were acquired and held …in connection with [the appellant’s] business”, “were not acquired for trading purposes”, and “constituted an investment …in the equity of the [mining companies]… intentionally [made]…with a view to further strategically enhancing its future growth, and recoveries/cash flow generated from its business.”
Furthermore, she did not find significant support for the proposition advanced by the appellant that “losses incurred by disposing of property that is ‘inextricably linked’ to the ongoing operation of the business are on income account”.
Neal Armstrong. Summary of Procon Mining and Tunnelling Ltd. v. The King, 2024 FCA 1 under s. 18(1)(b) – capital loss v. loss.
Maverick Oilfield – Federal Court quashes a CRA decision not to provide full interest relief for companies’ failure to make tax remittances due to their CEO’s incompetence and deception
The applicants were an Alberta oilfield service company and a trucking company, each owned equally by Mr. Schnell and his spouse, and directed by him. In order to semi-retire, in 2012 he hired a Mr. Challis as the CEO of both companies, and a CFO. Mr. Challis ran those successful companies into the ground within a few years. Furthermore, employees, including the accountant and the CFO, deceived Mr. Schnell in order to conceal emerging problems and Mr. Challis’ incompetence. Mr. Schnell did not become aware of the companies’ failures to make the required remittance until May 2018, whereupon he fired the CEO and CFO, retook control of the companies, and entered into a payment arrangement with CRA in April 2018, and used his personal resources to make full payment by January 2020.
CRA denied the companies’ applications for relief from interest and penalties accrued during their 2014 through 2020 taxation years, made on the basis of “extraordinary circumstances leading to … financial hardship.” CRA granted relief only from interest assessed during the CRA approved payment arrangements, and took the view inter alia that “the director [Mr. Schnell] remained responsible to take the necessary measures … to ensure that all obligations [were] met when required” and failed to do so.
Zinn J found this decision to be unreasonable, so that it was quashed and the requests for relief remitted to a different decision maker. First, the CRA finding that it was within the control of Mr. Schnell as director to avoid the late remittances did not address the active concealment by Mr. Challis and other employees of the late remittances.
Second, regarding a CRA finding “that extraordinary circumstances cannot persist over several years”, Zinn J stated that “[t]here is no temporal limitation on extraordinary circumstances”.
Third, it was evident that the consequences of Mr. Challis’ actions did not immediately end with his firing (the companies simply did not have the financial resources to make the necessary payments after such firing) and CRA’s finding to the contrary was unreasonable.
Neal Armstrong. Summary of Maverick Oilfield Services Ltd. & Latigo Trucking Ltd. v. Canada 2023 FC 1728 under s. 220(3.1).
9331-0688 Québec – Tax Court of Canada finds that three corporations wholly-owned by an individual could not make an ETA s. 156 election
Jorré J found that three corporations were ineligible to make the ETA s. 156(2) nil consideration election because they were not “closely related,” i.e., their mutual shareholder was an individual rather than a corporation.
Neal Armstrong. Summary of 9331-0688 Québec Inc. v. The King, 2023 CCI 173 under s. 156(1) – qualifying group.
Income Tax Severed Letters 3 January 2024
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Madison Pacific – Tax Court of Canada finds that two companies acted in concert to effectively acquire control of and transform a Lossco so as to access its losses contrary to s. 245(4)
The appellant (“MPP”) was an insolvent, publicly traded, mining company with accumulated net capital losses of $72.7 million. In order for two companies (“Madison” and “Vanac,” which dealt with each other and MPP at arm’s length) to access those losses and shelter gains from portfolios of rental properties, transactions were implemented, which first entailed the existing MPP mining business being transferred to a subsidiary, whose shares were effectively spun-off to the existing shareholders. Now that MPP was an empty shell, Madison and Vanac transferred respective portfolios of rental properties to MPP in consideration for the assumption of liabilities and for the issuance of a mixture of Class B voting shares and Class C non-voting shares (with the same attributes other than being generally non-voting) so that Madison and Vanac collectively held (and in equal proportions, after giving effect to some catch-up transactions to equalize those holdings) 46.6% of the voting rights and 92.8% of the equity of MPP. This transaction deliberately overvalued the shares that were so issued by MPP to Madison and Vanac so as to effectively transfer around $2.8 million of equity value to the existing public Class B common shareholders of MPP, thereby paying them for the losses. Taking into account the Class B shares held by friendly parties, such as directors, Madison and Vanac effectively had more than half the voting rights and, conversely, a significant portion of the public shareholders did not exercise their voting rights.
Regarding the denial of MPP’s losses under s. 245(2), MPP argued that it had received no tax benefit from the use of non-voting shares because, even if Madison and Vanac each had received only shares in the form of Class B voting shares, each would have acquired 46.4% of the MPP equity, so that neither would have acquired de jure control of MPP. Graham J rejected this submission on the basis that Madison and Vanac had been acting in concert in the transactions, so that, under this alternate scenario, there would have been an acquisition of control of MPP by a group of persons, thereby resulting in the application of s. 111(4). In particular, they had acted together to execute a sophisticated and artificial series of transactions to achieve the objective of gaining access to the MPP losses while effectively controlling it.
Regarding the abuse test under s. 245(4), Graham J concluded:
Subsection 111(4) is supposed to prevent a corporation from being acquired by unrelated parties in order to deduct its unused net capital losses against new capital gains for the benefit of its new shareholders. The series of transactions completely frustrated that purpose.
In this regard, after having noted that “the majority in Deans Knight highlighted that, while there had been no acquisition of control, there had been ‘the functional equivalent of such an acquisition of control’ by the company who effected the series of transactions (Matco)”, he indicated:
[T]he Madison-Vanac Group fundamentally transformed the Appellant. … They structured the series of transactions in a way that ensured they would receive substantially all of the benefit from the application of those losses to a completely new business. Finally, they selected the share compensation that they received in a way that ensured that, absent very unlikely circumstances, they could control the Appellant as if they had de jure control without actually taking that control.
Neal Armstrong. Summaries of Madison Pacific Properties Inc. v. The King, 2023 TCC 180 under s. 245(4) and s. 111(4).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released during June of 2002. Their descriptors and links appear below.
These are additions to our set of 2,682 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).