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Ipsen SA acquisition of Clementia Pharmaceuticals includes a significant contingent cash payment (CVR)

The cash consideration for the proposed acquisition of Clementia Pharmaceuticals (a Canadian-incorporated NASDAQ-listed clinical-stage biopharmaceutical company) by a Canadian Buyco subsidiary of Ipsen S.A. includes not only an up-front cash payment of US$25.00 per share (for an aggregate of US$1.04 billion) but also a deferred payment, on the achievement by the end of 2024 of FDA approval of a new drug application made by Clementia, in the form of a contingent value right ("CVR") of US$6.00 per Share. The Canadian tax disclosure states that the proceeds of disposition to a Clementia shareholder are the Canadian-dollar equivalent of the full U.S.$31 per Share, but that the Clementia shareholders should consult with their tax advisors as to the availability of an s. 42(1)(b) capital loss if the timely FDA approval is not achieved.

The U.S. tax consequences to U.S. shareholders turn on whether the fair market value of the CVRs is “reasonably ascertainable.”

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

Prince – Federal Court finds that a 30-day letter is not a judicially-reviewable “decision”

Annis J found that a CRA “fairness” letter to the taxpayer setting out proposed reassessments for his 2007 to 2016 taxation years and giving him 30 days to provide additional information and representations was not a “decision” that he had the jurisdiction to review under the Federal Courts Act.

In addition, even if he had such jurisdiction, he would not have exercised it in the taxpayer’s favour. Much of the taxpayer’s complaint was that the taxpayer at the same time was advancing his position that CRA should accept a “voluntary” disclosure made by him as being within the ambit of the CRA VDP program. Annis J found that there was nothing in this that was prejudicial given that “even if the VDP application was granted after the assessment was made, the CRA would issue a new reassessment taking into account its decision.”

Neal Armstrong. Summaries of Prince v. MNR, 2019 FC 348 under Federal Courts Act, s. 18.1(3) and ITA s. 220(3.1).

Supreme Court grants leave in MacDonald

The Supreme Court has granted leave to appeal in MacDonald, where the Federal Court of Appeal found that the question of whether a derivative was acquired as a hedge should be determined on an objective basis rather than having substantial regard to whether or not it was the intention of the taxpayer to acquire the derivative as a hedge.

Leave was declined in Rio Tinto (finding that fees incurred by a public board in determining to make a bid, as contrasted to its implementation, were currently deductible).

Neal Armstrong. Summary of The Queen v. MacDonald, 2018 FCA 128, leave granted 21 March 2019, under s. 9 – capital gain v. income – futures/forwards/hedges.

Crius Trust sale is to be accomplished as an asset sale followed by a unit redemption

Crius Energy Trust (the “Trust”) holds its US electricity and natural gas distribution business indirectly through a US corporate subsidiary (“US Holdco”). The shares of US Holdco are held through two Canadian corporate subsidiaries of the Trust; and debt owing by US Holdco (bearing interest at rates up to 11%) is held by a Canadian-resident subsidiary trust of the Trust. These Canadian subsidiaries are intended to be portfolio investment entities.

The equivalent of a sale of the Trust for cash will be accomplished by the shares of the two Canadian subsidiaries and the debt being sold to the purchaser (a subsidiary of Vistra Energy Corp.) for cash, with the cash then being used by the Trust to redeem its units, with the realized capital gains being distributed on the redemption. This produces an efficient result for the resident unitholders, as the distributed capital gains should not reduce the ACB of their units.

The transactions are expected to close in the second quarter of 2019. If the transactions instead occurred in a taxation year of the Trust beginning after the 2019 budget date, draft s. 132(5.3) effectively would impose Trust-level tax on an indeterminate portion of the capital gain on the sale that was distributed and allocated to the redeemed unitholders. Accordingly, it would be necessary to structure the sale differently – e.g., a sale of the subsidiaries for both cash and a note of the purchaser, distributing the resulting capital gain in cash to the unitholders, and then having the unitholders sell their Trust units to the purchaser for cash.

For US purposes, the Trust is treated as a partnership. The gain recognized on the sale of the subsidiaries increases the basis of the US unitholders in the units of the Trust, thereby helping to alleviate from double taxation on the units’ redemption.

Neal Armstrong. Summary of Crius Energy Trust Circular under Spin-Offs & Distributions – REIT sales proceeds distribution.

CRA continues to accept deliberate triggering of CDA additions for distribution purposes

CRA noted that the approach of the GAAR Committee to surplus-stripping has changed significantly:

  • Since 2015-0610701C6 the Committee has considered that it will no longer recommend the application of GAAR to certain corporate reorganizations through which there is a deliberate triggering of a capital gain in order to distribute a capital dividend to its shareholders.
  • Conversely, consistently with Descarries and Pomerleau, the Committee will now apply GAAR to a surplus-stripping arrangement involving the transfer of a family business to a related party.

Neal Armstrong. Summary of 7 March 2019 CTF GAAR Seminar - Suzanne Saydeh on GAAR Committee under s. 245(4).

Income Tax Severed Letters 20 March 2019

This morning's release of 6 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA rules on hybrid post-mortem 164(6)/pipeline transactions

CRA has provided the usual rulings for a pipeline transaction in which the estate with a resident beneficiary sells a company (Opco) with apparently some sort of real estate business to a Newco for consideration consisting mostly of a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time. These pipeline transactions are to be immediately preceded by transactions in which the estate utilizes Opco's capital dividend account to step up the ACB of a portion of its Opco shares and also to redeem those Opco shares so as to generate a capital loss that can be carried back under s. 164(6).

The ruling letter stipulates that the amalgamation will occur no sooner than 12 months after the sale to Newco, and that thereafter the note will be paid off no faster than 10% per quarter for the first year. This contrasts with:

Neal Armstrong. Summary of 2018 Ruling 2018-0780201R3 under s. 84(2).

Sampson - B.C. Supreme Court finds that a Calgary executive with a large B.C. home had his “principal place of residence” in B.C.

The taxpayer, described as “a wealthy CEO of an international energy company,” maintained a 600 square foot apartment within three blocks of the Calgary headquarters of his employer, but spent over half of his Canadian time in B.C., where there was a 10,000 square foot home (near his parents’ home) owned by his wife and where their social life was centered. Gaul J found that although the taxpayer was resident both in B.C. and Alberta, B.C. was the taxpayer’s “principal place of residence” under the tie-breaker rule in Reg. 2607, so that he was subject to B.C. income tax. Not only did he spend somewhat more time there, but he also “had a much closer and profound personal tie” with B.C.

Neal Armstrong. Summary of Sampson v British Columbia, 2018 BCSC 1503 under Reg. 2607.

A Oy – European Court of Justice finds that a demolition or dismantling contract entailed a barter exchange of demolition/dismantling services and materials for VAT purposes

Pursuant to demolition contracts, a company undertook to demolish old factory buildings with responsibilities that included the disposal and processing of materials and waste. It took the estimated sales proceeds of the scrap metal and other materials generated into account in quoting its price for the work but did not communicate this estimate to the customer for commercial reasons. The company also undertook dismantling contracts under which the equipment and materials to be removed had an estimated value such that the company would pay the customer to enter into the contract (rather than being paid to perform the dismantling).

The 9th Chamber held in both cases there was a reciprocal supply of a demolition or dismantling service and of goods (the removed materials or equipment) for VAT purposes. In the first case, the

the supply of recyclable scrap metal is made for consideration if the person acquiring it, namely a demolition company, attributes a value to that supply which it takes into account in the calculation of the price quoted for carrying out the demolition works

with the consideration it received for its demolition work effectively being grossed up by this estimated amount.

Similarly, in the second (dismantling) case:

[T]he value of the performance of dismantling and waste disposal … must be regarded as equal to the amount that the purchaser, that is a demolition company, takes into account as a factor reducing the purchase price of the goods to be dismantled.

…[T]he taxable base of the supply of goods to be dismantled is, therefore, constituted by the price actually paid for the purchase of those goods and the amount corresponding to the factor applied by the purchaser in order to reduce the purchase price proposed.

A similar gross up of consideration for reciprocal supplies might occur under ETA s. 153(1). This would be problematic for the parties, who thereby would be required for GST/HST purposes to invoice each other based on subjective imputed amounts.

Neal Armstrong. Summary of A Oy v. Veronsaajien oikeudenvalvontayksikkö, [2019] EUECJ C-410/17 (10 January 2019) European Court of Justice (9th Chamber) under ETA s. 123(1) - consideration.

6 more translated CRA interpretations are available

We have published a further 6 translations of interpretations. One of these interpretations was released by CRA last week and five were released in May 2012. Their descriptors and links appear below.

These are additions to our set of 807 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2019-03-13 12 February 2019 Ministerial Correspondence 2018-0741061M4 F - Revenu d’un Indien Other Legislation/Constitution - Federal - Indian Act - Section 87 pension income generated from off-reserve employment and received on reserve not exempted
2012-05-18 30 March 2012 Internal T.I. 2011-0408311I7 F - Résidence principale General Concepts - Ownership ownership of home generally follows legal title
Income Tax Act - Section 54 - Principal Residence - Paragraph (a) must be described combination of ownership and ordinary habitation
2012-05-11 28 March 2012 External T.I. 2011-0422531E5 F - Revenu fractionné Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (c) - Subparagraph (c)(ii) - Clause (c)(ii)(C) only a portion of s. 104(13) income might be split income
24 April 2012 Internal T.I. 2012-0440711I7 F - Indemnité de repas; remboursement pour déplacement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) policy re subsidized meals does not extend to meal allowances or vouchers
30 March 2012 External T.I. 2011-0428741E5 F - Allocations pour frais de déplacement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) travel allowance for additional travel to and from work might be taxable even where employer fault
23 January 2012 External T.I. 2011-0424671E5 F - Avantage imposable - Stationnement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) generally no benefit from free parking if employee must use car 3 days a week in duties