News of Note

Chriss – Federal Court of Appeal finds that a written resignation must be signed and delivered to the corporation to start the two-year s. 227.1(4) period running

The husband of a director had instructed their law firm to prepare a written resignation for her, which they did, but the resignation form was never provided to her. In reversing a finding of Boyle J that this was sufficient to amount to a written resignation that started the two-year limitation period in s. 227(4) running, Rennie JA stated:

…In the absence of the communication of a written resignation to the corporation, a resignation is not effective. …

… Reliance on the subjective intention or say-so of a director alone would allow a director to plant the seeds of retroactive resignation, only to rely on it at some later date should a director-linked liability emerge. …[T]he dangers associated with allowing anything less than delivery of an executed and dated written resignation are unacceptable.

With these strong words, he unsurprisingly went on to find that it was not a sufficient due diligence defence for the director to think that she had resigned.

Neal Armstrong. Summaries of The Queen v. Chriss, 2016 FCA 236 under s. 227.1(4) and s. 227.1(3).

Lightstream Resources is proposing to eliminate $1.2B in debt under a voluntary recapitalization plan giving 95% of the company to the secured noteholders and 2.75% to the unsecured noteholders

Lightstream Resources carries on its business through two partnerships. As at the end of 2015, it had $1.53B in Canadian tax pools available to it. It had approximately Cdn.$1.53B of long-term debt as at June 30, 2016 comprising Secured Notes of U.S.$650M, Unsecured Notes for U.S.$254M and amounts owing under a Revolving Credit Facility. It defaulted on an interest payment owed to the Secured Noteholders in June 2016, and is proposing a "Recapitalization" transaction (mostly occurring under a CBCA Plan of Arrangement) which, in approximate terms would entail

  • a s. 86 exchange by its common shareholders of their shares for new common shares representing approximately 2.25% of the post-Recapitalization issued and outstanding common shares plus three-year out-of-the-money Warrants to acquire three times that number of common shares,
  • the exchange by the Unsecured Noteholders of their Notes for common shares representing 2.75% of that total plus three-year Warrants (not as much out-of-the-money) to acquire the equivalent of 5% of the common shares and
  • the exchange by the Secured Noteholders for common shares representing 95% of that total (with Apollo and GSO Capital Partners holding about 75%).

These exchanges (net of some additional secured borrowings) would eliminate Cdn.$1.175B of debt and eliminate $108 million of annual interest expense.

The transactions are structured so that the forgiveness respecting the Unsecured Notes will occur immediately before an amalgamation of Lightstream with a wholly-owned numbered company, whereas the exchange of the Secured Notes will occur after the amalgamation. The exchange of the old common shares is to be structured as a s. 86 exchange (with the value of the warrants received not expected to give rise to a deemed dividend), the exchange of the Unsecured Notes will occur on a non-rollover basis and the exchange of the Secured Notes is targeted to occur on a s. 51 rollover basis (assuming the Secured Notes can qualify as capital property), so that a conversion right is first to be added to the Secured Notes before the conversion occurs.

There is a backstop plan to accomplish something similar under the CCAA if this Recapitalization plan is not approved.

Neal Armstrong. Summary of Lightstream Circular under Other – Recapitalizations or note exchanges.

Joint Committee releases its submissions on the B2B and s. 152(9) rules

In addition to reiterating its recommendations from its July 25, 2016 submission on the back-to-back (B2B) rules (now reflected in the July 29 draft legislation), the Joint Committee has now provided various examples of technical glitches which already have emerged respecting the duplicative application of s. 15(2), a failure of s. 212(3.6)(a) to properly distinguish shares of a relevant funder that are intended to be captured by the character substitution rule from those which are not (and also problems with the somewhat similar language of s. 212(3.92)(a)), problems with the interaction with the s. 216 rules (which could simply be addressed by exempting rental payments which are subject to s. 216 treatment) and problems for some types of cross-border securitization arrangements.

The Joint Committee has also separately submitted that the s. 152(9) draft legislation should not extend to, in effect, permitting new assessments beyond the normal reassessment period (where the waiver and misrepresentations exceptions do not apply).

27 September 2016 Joint Committee Submission on the B2B rules and 27 September 2016 Joint Committee Submission on s. 152(9) draft legislation.

Income Tax Severed Letters 28 September 2016

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

Full text translations of income tax severed letters now available

We have prepared full-text translations of all French technical interpretations and Roundtable questions and answers that have been released by CRA since 27 April 2016.

The original French text can be accessed by clicking on the "Text of Severed Letter" icon at the top of the translated letter. The translations are paywalled in the usual (4-days per week) manner. From here, we will continue going back in time with our translations as well as keeping up with current French severed letters (other than most rulings).

The table below links to the recent translations and the summaries thereof (as well as these items being searchable and retrievable in the usual manner).

Bundle Translated severed letter Summaries under Summary descriptor
2016-09-21 27 April 2016 External T.I. 2016-0625001E5 F - Surplus Stripping Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distribution of s. 84(1) dividend effected with note issuance
Income Tax Act - Section 245 - Subsection 245(4) funnelling deemed dividend to holdco trust beneficiary and resulting PUC to individual beneficiary/shareholder was surplus stripping
Income Tax Act - Section 84 - Subsection 84(2) using a trust to funnel a deemed dividend from creating PUC to a Holdco beneficiary and funnelling that PUC to the individual beneficiary, is surplus stripping
2 May 2016 External T.I. 2016-0633351E5 F - Descarries Case and Document no. 2015-0610711C6 Income Tax Act - Section 84.1 - Subsection 84.1(1) purpose of 84.1 not restricted to monetization transactions
Income Tax Act - Section 245 - Subsection 245(4) Descarries not to be construed narrowly
2016-09-14 10 June 2016 External T.I. 2015-0590371E5 F - Résidence principale - stationnement Income Tax Act - Section 54 - Principal Residence - Paragraph (e) a parking space can form part of a condo housing unit
Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b) designating condo parking space for a year does not exhaust exemption for the condo unit
1 December 2015 Internal T.I. 2015-0588381I7 F - Classification of US-LLCs Statutory Interpretation - Interpretation Act - Section 8.1 8.1 effected no change/2 step-approach should be inter-provincial
Income Tax Act - Section 96 corporation/partnership classification of foreign entity not affected by Quebec residence of member
Income Tax Act - Section 248 - Subsection 248(1) - Corporation status of Delaware, NY and Florida LLCs as corps not affected by Quebec residence of member
5 January 2016 External T.I. 2015-0568911E5 F - MRC - Revenu d’entreprise Income Tax Act - Section 256 - Subsection 256(5.1) test references dominant person
Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(d.5) Quebec regional county municipality is municipality
11 April 2016 External T.I. 2015-0564161E5 F - IT-522R par. 36 Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(f) non-taxable s. 6(1)(b)(v) allowance for one type of expense does not preclude s. 8(1)(f) deduction for other types
2016-09-07 7 June 2016 External T.I. 2014-0532451E5 F - Crédit pour la création d’emplois pour apprentis Income Tax Act - Section 127 - Subsection 127(9) - Eligible Apprentice apprenticeship contracts include collective agreements/24-month period runs from issuance of apprentice competency certificate
13 July 2016 External T.I. 2013-0513701E5 F - Montant pour enfant Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(b.1) child accepted as ordinarily residing with parent with joint custody
13 July 2016 External T.I. 2013-0478961E5 F - Interest in a family farm or fishing partnership Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Interest in a Family Farm or Fishing Partnership qualification of partnership units as interests in a family farm or fishing partnership can be based on a previous period of farming use of its assets
24 June 2016 Internal T.I. 2014-0555611I7 F - Allocation raisonnable Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(x) kilometer-based minimum allowance must be intended to compensate for actual expenses
2016-08-10 11 July 2016 External T.I. 2015-0592681E5 F - RRIF Death of an annuitant Income Tax Act - Section 146.3 - Subsection 146.3(1) - Annuitant surviving spouse who has been predesignated can qualify as an RRIF annuitant even if he or she does not receive any annuity payments
Income Tax Act - Section 146 - Subsection 146(1) - Refund of Premiums consequence of death if named as beneficiary in RRSP contract
Income Tax Act - Section 60 - Paragraph 60(l) transfer by eligible recipient of payment out of RRIF
Income Tax Act - Section 146.3 - Subsection 146.3(6.2) deduction for transfer to eligible recipient by surviving spouse
2016-07-13 3 June 2016 External T.I. 2016-0647621E5 F - Dividend designation from a trust - timing Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(a) dividend distributed by a trust to a connected corporation can be subject to Part IV tax due to the delayed implied effective date of s. 104(19) designations
Income Tax Act - 101-110 - Section 104 - Subsection 104(19) designation not effective until end of year
2016-07-06 20 June 2016 External T.I. 2014-0559961E5 F - Subsection 39(4) - securities owned by partnership Income Tax Act - Section 39 - Subsection 39(4.1) limited partners carry on the trading business of their LP for purposes of the election
20 June 2016 External T.I. 2016-0651951E5 F - Amalgamation - non-capital loss of new corporation Income Tax Act - Section 87 - Subsection 87(2.1) no carryback of losses of new corporation formed by amalgamation of 2 sisters
20 June 2016 External T.I. 2016-0648481E5 F - Small business deduction and GRIP Income Tax Act - Section 125 - Subsection 125(1) SBD discretionary
Income Tax Act - Section 89 - Subsection 89(1) - Adjusted Taxable Income CCPCs can choose to forego the small business deduction so as to maximize their GRIP
2016-06-29 4 April 2016 Internal T.I. 2016-0625241I7 F - Application of section 207.31 Income Tax Act - 101-110 - Section 110.1 - Subsection 110.1(1) - Paragraph 110.1(1)(d) tax on subsequent disposition irrespective of deduction claimed
Income Tax Act - Section 207.31 tax on sales of ecological lands applies even if no deduction was claimed
16 June 2016 External T.I. 2015-0623031E5 F - Application of paragraph 7(1)(b) General Concepts - Effective Date contingent amount included under s. 7(1)(b) cannot later be reversed
Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b) contingent amount included under s. 7(1)(b), cannot subsequently be excluded
2016-06-22 20 April 2016 External T.I. 2016-0633961E5 F - Computation of safe income - stub period Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) recapture/eligible capital amount realized on sale before safe-income determination time included in safe income
2016-06-15 27 April 2016 External T.I. 2016-0633101E5 F - Attribution of safe income Income Tax Act - Section 55 - Subsection 55(1) - Distribution discretionary dividend shares may not satisfy the distribution definition
Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) discretionary dividend will not reduce safe income attributable to the other class of discretionary dividend shares to the extent the dividend is taxable under s. 55(2)
2016-05-18 30 March 2016 External T.I. 2016-0629701E5 F - bump-up 88(1)(d) Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate land developer accesses capital property status of land held in acquired subsidiary
Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) land developer can bump the cost amount of land (for use by it as land inventory) which was held by a target as capital property when its control was acquired
15 October 2015 Internal T.I. 2014-0527041I7 F - Disposition de biens Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) merely facilitative expenses not deducible
2016-05-11 31 March 2016 External T.I. 2014-0524391E5 F - Debt parking Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(f.1) application of s. 53(1)(f.1) subsequent to application of debt parking rule
Income Tax Act - Section 80.01 - Subsection 80.01(8) debt parking rule can apply even if no capital loss is recognized
5 January 2016 External T.I. 2013-0515771E5 F - Établissement semblable agréé Income Tax Act - Section 37 - Subsection 37(1) - Paragraph 37(1)(a) - Subparagraph 37(1)(a)(ii) - Clause 37(1)(a)(ii)(B) applicant’s activities not unquestionably SR&ED
15 March 2016 External T.I. 2015-0606911E5 F - Home Accessibility Tax Credit Income Tax Act - Section 118.041 - Subsection 118.041(3) claimant must be a qualifying or eligible individual
2016-04-27 21 January 2016 Ordre des CPA du Québec Personal Taxation Roundtable Q. 9, 2016-0625141C6 F - Principal residence - duplex Income Tax Act - Section 54 - Principal Residence interior access door to other unit in duplex occupied by elderly parent, and meal sharing, not sufficient to render as one housing unit
21 January 2016 Roundtable, 2016-0625131C6 F - Farming losses Income Tax Act - Section 31 - Subsection 31(1) traditional CRA policy on s. 31 is still reflective of its position post-Craig
21 January 2016 Roundtable, 2016-0624871C6 F - Colloque CPA- Frais médicaux - medical expenses Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(a) expenses of doctor travel and of Quebec naturopaths and osteopaths excluded
Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(d) nursing home can be part of a facility
21 January 2016 CPA Personal Income Tax Roundtable Q. 7, 2016-0625731C6 F - Fees related to a voluntary disclosure Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc) VDP fees deductible if re business
Income Tax Act - Section 60 - Paragraph 60(o) professional fees incurred after a voluntary disclosure is accepted commence to be deductible
21 January 2016 Roundtable, 2016-0624851C6 F - Spousal sharing of charitable gifts made by will Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts gifts made by will of the deceased can no longer be treated as gifts by a surviving spouse
21 January 2016 Roundtable, 2016-0624811C6 F - Employee Assistance Program Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(iv) restricted to advice, valued at hypothetical cost
21 January 2016 Roundtable, 2016-0625161C6 F - Résidence principale habitée par un enfant Income Tax Act - Section 54 - Principal Residence - Paragraph (a) related occupant of a principal residence can be charged FMV rent