News of Note

The addition to a private corporation’s capital dividend account does not include any portion of a “negative ACB” gain under s. 40(3.1).

A taxpayer unsuccessfully submitted that a negative ACB gain realized by an upper-tier LP on its units in a lower-tier LP should not be treated, when allocated to the upper-tier LP’s partners, as a s. 40(3.1) gain for CDA purposes. CRA stated that a partnership’s income, when allocated to its partners, “will generally retain its nature and characteristics.”

Neal Armstrong. Summary of 21 June 2017 External T.I. 2016-0678361E5 Tr under s. 89(1) – capital dividend account - s. (a)(i)(A).

The definition in the ETA of the “recipient” of a supply refers to the person who, under the agreement for a supply, is liable to pay the consideration therefor. CRA indicated that it did not consider someone to be the recipient of a supply merely because that someone was contractually liable to pay the consideration for the supply.

In particular, an ATM provider (the Vendor) agreed that X’s acquisition of the Vendor’s ATMs would be financed by Vendor selling the ATMs to Lessor, with Lessor then leasing the ATMs to X. Lessor was not licensed the related software by Vendor but nonetheless agreed to pay the software licence fees of the Vendorr. CRA stated:

In determining who the recipient of a supply is, and who may therefore be entitled to an ITC for any tax payable on the supply, it is necessary to determine whether the supply is acquired by a person on its own behalf or as an agent on behalf of another person. The [recipient] definition refers to ‘consideration for the supply’. However, in the present case, the [Lessor] has not acquired any supply of software licences, and is therefore not entitled to claim any ITC for the tax paid for them.

Neal Armstrong. Summary of 28 April 2017 Interpretation 154249 under ETA s. 123(1) – recipient.

Flow-through share (FTS) issues arising in an M&A context include:

• Where a merger agreement has been signed between the target principal business corporation (PBC) and an acquiror and the target thereafter issues FTS, those FTS could be prescribed shares under Reg. 6202.1(1)(d).
• Somewhat similarly, given an apparent CRA position that s. 84(9) can apply to deem FTS to be disposed of, on an amalgamation, to the PBC, FTS which are issued after the announcement of a long-form amalgamation may result in a prescribed share issue under Reg. 6202.1(1)(d).
• It could be argued that since a corporation is not wound up until it is dissolved rather than the earlier time that it makes a winding-up distribution of its business to its parent, the continuity rule in s. 88(1.5) does not work during this gap in time.
• It is unclear whether the continuity rule in s. 87(4.4) works where, on an amalgamation, the amalco issues a replacement share to someone who had acquired the “old” FTS from someone who, in turn, had acquired the FTS from the original subscriber, i.e., there are two subsequent purchases of the FTS rather than only one.

In private discussions, CRA:

confirmed that the subscription agreement need not restrict damages to additional federal and provincial taxes payable, as the CRA considers a general common law right to sue for damages otherwise available as not constituting a prescribed share issue.

Some Alberta decisions effectively confirm that the FTS holder's contractually-provided right to damages for addition taxes disappears on a CCAA compromise.

Neal Armstrong. Summaries of Gregory M. Johnson and Wesley R. Novotny, “An Update on Flow-through Shares in the Energy Sector” 2016 CTF Annual Conference draft paper under s. 66(15) - flow-through share, Reg. 6202.1(1)(d), s. 88(1.5), s. 87(4.4)(d)(i), Reg. 6202.1(1.1)(c), Reg. 6202.1(5) - excluded obligation, s. 66(12.73), s. 163(2.21).

Tembec, which is a TSX-listed CBCA corporation, agreed to a CBCA Plan of Arrangement with NYSE-listed Rayonier AM under which its (common) shares were to be acquired by Rayonier AM for consideration (at each Tembec shareholder’s option) of C$4.75 cash or 0.2542 of a Rayonier AM common share – except that proration would occur so as to result in the overall consideration being more or less fixed at 67% cash and 33% shares. However, the Plan of Arrangement specifies that Rayonier AM may designate a direct or indirect wholly-owned subsidiary to effect the acquisition. If this does not occur, then a large Delaware corporation (Rayonier AM) will be subject to obligations, such as to deliver shares in its capital, under a CBCA Plan of Arrangement.

19.9%, 18.0% and 15.9% of the Tembec shares were held by two US LPs and by Fairfax. The two US LPs, but not Faifax, were parties to the support agreement. The transaction will occur on a non-rollover basis for both Canadian and U.S. purposes, and no provision for exchangeable shares was made. For reasons that are not indicated, some preliminary steps in the Plan of Arrangement include a drop-down of assets of one subsidiary (Mattagami Railroad Company) into another subsidiary.

Neal Armstrong. Summary of Tembec Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.