News of Note
CRA will entertain ruling requests to consider when a “right to reduce” arises under a Plan of Arrangement
A “right to reduce” is defined in s. 143.4(1) as “a right to reduce or eliminate an amount in respect of an expenditure at any time, including, for greater certainty, a right to reduce that is contingent upon the occurrence of an event, or in any other way contingent, if it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable.”
2016-0628741I7 appeared to indicate that where, under a Plan of Arrangement, interest of a debtor will be forgiven, s. 143.4 will apply in the year the Plan is approved by the creditors to reduce the interest amount rather than in the subsequent year when the Plan is implemented. If CCAA procedures commence in Year 1, the creditors approve the Plan in Year 2, and the Plan is implemented in Year 3, when will a “right to reduce” arise for s. 143.4 purposes?
CRA indicated that when a right to reduce arises under s. 143.4(1) will require a determination of when the legal right, albeit contingent, arises, and whether it is reasonable to conclude that the right will be exercisable. In the case of an interest that is forgiven under a CCAA proceeding, this will include a review of the Plan of Arrangement and the terms of the contingencies contained in the Plan. CRA would be willing to review this issue in a ruling application, where it could review the terms of the Plan.
This seems to indicate that the answer is Year 2 or 3, depending in part on how big the contingencies are.
CRA indicates that the s. 74.4(4)(a) exception does not apply where the indirect transfer is to a subsidiary of the trust-owned corporation
A resident individual transfers $100 to a discretionary trust (whose beneficiaries include minors, i.e., “designated beneficiaries”), which uses the $100 to subscribe for shares of Holdco (wholly-owned by it) which, in turn, uses the $100 to subscribe for shares of its subsidiary (Subco), so that Subco (which is not a small business corporation) can acquire investments. Will s. 74.4(2) apply?
After noting that there was insufficient information to determine whether the purpose test in s. 74.2(2) applied, CRA found that the exception in s. 74.4(4) (which required inter alia that “the only interest that the designated person has in the corporation is a beneficial interest in the shares of the corporation held through a trust”) did not apply given that “the corporation” to which the indirect transfer had occurred was Subco, whereas the minor children had a beneficial interest only in the shares of Holdco, not of Subco. Furthermore, assuming that the Trust was a discretionary trust, each child would be deemed under para. (e) of the specified shareholder definition to wholly-own Holdco, so that each child also would be a specified shareholder, under that definition, of the related corporation (Subco) – thus the test in s. 74.4(2)(a) also would be satisfied. Accordingly, s. 74.4(2) would apply assuming that the purpose test was satisfied.
CRA determined that a Singapore corporation was a resident there for Treaty purposes – even though it was subject to tax on a territorial basis - provided its CMC was there
Generally, a person must be “liable to tax” in a contracting state to be a resident there for treaty purposes. Per CRA, a person must be subject to the most comprehensive form of taxation as exists in that contracting state to be liable to tax therein.
CRA reported that it had been asked to comment on whether a corporation that was incorporated in Singapore would be viewed as a Treaty resident of Singapore, which typically taxes income that is sourced in Singapore, or remitted to Singapore. CRA’s conclusion was that such corporation was a resident of Singapore that could therefore benefit from the Treaty, provided that its central management and control was in Singapore at all relevant times.
CRA indicates that s. 86.1 treatment is not available where a spin-off is structured as a share exchange transaction
The definition of eligible distribution in s. 86.1(2) accommodates the packaging by a US public company (US Pubco) of a portion of itself into a subsidiary (the Spinco), followed by a dividend-in-kind by US Pubco of the Spinco shares to its shareholders – so that, provided the other conditions are satisfied, the Canadian shareholders can receive rollover treatment. CRA confirmed that s. 86.1 rollover treatment was not available where the spin-out takes the form of an exchange transaction, i.e., pursuant to an exchange offer, the shareholders are given the choice of exchanging US Pubco shares for Spinco shares based on the stipulated terms.
We have published a translation of a CRA ruling released last week and a further 10 translations of CRA interpretation released in May and April, 2006. Their descriptors and links appear below.
These are additions to our set of 1,828 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 15 2/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the "open" week for December.
CRA indicates that where a s. 15(2) inclusion that was offset under s. 20(1)(ww) because it was subject to TOSI, there nonetheless can be a s. 20(1)(j) deduction when the loan is repaid
An amount, which is included in the income of an individual (X) under s. 15(2) is also subject in the individual’s hands to the tax on split income (TOSI) under s. 120.4(2) (TOSI), so that X is entitled to a deduction under s. 20(1)(ww) for the income subject to TOSI (being also equal to the s. 15(2) income inclusion).
In a subsequent taxation year, X repays the shareholder loan. CRA indicated that having claimed the s. 20(1)(ww) deduction would not preclude X from subsequently claiming the s. 20(1)(j) deduction when the loan was repaid – and indicated that this appeared to be the right policy result.
Alta Energy – Supreme Court of Canada finds that Treaty shopping to avoid capital gains tax on Canadian resource assets was contemplated, and not a Treaty abuse
Two US firms transferred their investment in a Canadian subsidiary (Alta Canada), that was to develop a shale formation in northern B.C., to a Luxembourg s.à r.l. (Alta Luxembourg). Alta Luxembourg was resident in Luxembourg for Treaty purposes as it had its legal seat there, albeit no substantial economic presence there. About two years after the acquisition by Alta Canada of the exploration licences, it was sold to Chevron Canada at a significant gain. The Crown no longer disputed that such gain was exempted from Canadian capital gains tax under the exclusion in Art. 13(4) of the Canada-Luxembourg Treaty (the “business property exemption”), which provided that the Alta Canada shares were not deemed immovable property (and thus not subject to Canadian capital gains tax) on the basis that the exploration licences were property of Alta Canada “in which the business of the company … was carried on” - but maintained its position that such exemption of the gain constituted an abuse of the Treaty, contrary to s. 245(4).
Rowe and Martin, JJ, jointly speaking for the minority of three, accepted that, under the Treaty, the “allocation of taxing powers follows the theory of ‘economic allegiance’," under which “taxes should be paid on income where it has the strongest ‘economic interests’ or ties, either in the state of residence or the source state,” – whereas here there was an abuse of that Treaty object since the “evidence demonstrate[d] that Alta Luxembourg had no genuine economic connections with Luxembourg as it was a mere conduit interposed in Luxembourg for residents of third-party states to avail themselves of a tax exemption under the Treaty.”
Côté J, for the majority, considered this to be contrary to a proper appreciation of the nature of the bargain that Canada had struck under the Treaty. The object of the business property exemption was to provide a “tax break [that] encourages foreigners to invest in immovable property situated in Canada in which businesses are carried on (e.g. mines, hotels, or oil shales).”
Moreover, the use of conduit corporations, ‘legal entit[ies] created in a State essentially to obtain treaty benefits that would not be available directly’, was not an unforeseen tax strategy at the time of the Treaty” and, instead, Luxembourg was well known as “an attractive jurisdiction to set up a conduit corporation and take advantage of treaty benefits.” Indeed, Canada’s acceptance of the use of conduit corporations was implicit in Art. 28(3), which provided a very narrow exception to Treaty residence status for only certain, rather than all, types of “holding companies with minimal economic connections to Luxembourg.” Canada “could also have insisted on a subject-to-tax provision” under which it would forego its right to tax capital gains only if the other state actually taxed those gains – but did not.
Côté J stated:
The absence of a subject-to-tax provision, combined with Canada’s knowledge of Luxembourg’s tax system, confirms my view that Canada’s primary objective in including art. 13(4) was to cede its right to tax capital gains of a certain nature realized in Canada in order to attract foreign investment. It was not part of the bargain that Luxembourg actually tax the gains to the same extent that Canada would have taxed them.
Thus, Canada had bargained for treaty shopping in order to increase investment in assets of this type, so that such treaty shopping was not abusive.
Following the death of the father, his preferred shares of a CCPC (“Opco”), that held only cash as a result of having sold all its marketable securities, were distributed by his estate to his three beneficiaries (his three children), and then Opco was divided equally between the three holding companies for the three children’s families, each holding 1/3 of the Opco common shares.
This was not accomplished pursuant to a butterfly. Instead, Opco was wound up into the three Holdcos pursuant to s. 88(2), thereby giving rise, to some extent, to deemed dividends pursuant to ss. 88(2)(b) and 84(2).
The taxpayers represented that each dividend arising under ss. 88(2)(b) and 84(2) will not significantly reduce the capital gain that, but for that taxable dividend, would have been realized on a disposition of a share of Opco at FMV immediately before such dividend. On this basis, CRA ruled that s. 55(2) would not apply.
CRA indicates that the payment of damages, for breach of reps, by the parent following a triangular amalgamation would not preclude satisfaction of s. 87(4) or (1)
We have provided a summary of the Roundtable held today (online) at the Canadian Tax Foundation Annual Conference.
Q.1 dealt with a triangular amalgamation under which a subsidiary of Parent amalgamated with Target and the Target shareholders received shares of Parent. S. 87(4) requires that such shares be the only consideration received by the Target shareholders “on the amalgamation.”
CRA noted that any payments made by Parent to the Target shareholders for any breaches of representations or warranties would normally be made well after the amalgamation, and would not be viewed as consideration for shares paid on the amalgamation, so that s. 87(4) could still be satisfied– and it also would not be problematic if the compensation was paid by Parent in the form of issuing additional shares. Post-amalgamation damages payments also would not be problematic regarding satisfaction of the condition in s. 87(1)(a).
Suppose that, to address a potential indemnity payment going in the other direction, some of the Parent shares issuable to the Target shareholders are placed in escrow. If no claim arises during the stipulated period, the shares are released from escrow. If an indemnity claim is made by Parent, Parent repurchases shares, having a value equaling the claim amount, for $1 and cancels them, with only the balance of the shares, if any, being released from escrow.
CRA indicated that it would consider the amount paid for the repurchased shares for s. 84(3) purposes to be the claim amount, so that a deemed dividend could arise.