News of Note
A Gold Fields Ontario subsidiary is proposing to acquire all the common shares of Osisko for cash
Email this ContentIt is proposed that an indirect Ontario subsidiary of Gold Fields (the “Purchaser”) acquire the (common) shares of Osisko (a TSX-listed Ontario corporation whose principal asset is a 50% interest in the Windfall gold project in Quebec) for $1.9B in cash. The Purchaser acquired the other 50% interest in the Windfall Project in May 2023. Under the proposed Ontario Plan of Arrangement, which stipulates that the steps will occur at two-minute intervals starting at 12:01 a.m. Toronto time, a step has been inserted, between the cash-surrender of the RSUs and the cash-surrender of the DSUs, providing that all the directors shall be deemed to have resigned, so that for discrete intervals of time, Osisko will have no directors.
The Canadian tax disclosure contains detailed disclosure regarding the capital gains inclusion rate transitional rules.
Neal Armstrong. Summary of 6 September 2024 Circular of Osisko Mining Inc. (the “Company” or “Osisko”) respecting its acquisition by Gold Fields Windfall Holdings Inc. (the “Purchaser”) under Mergers & Acquisitions – Mergers – Shares for Cash.
CRA discusses EIFEL filing and election procedures absent forms, and waives the requirement for a s. 18.2(6) return
CRA has published a Webpage on the EIFEL (excess interest) rules. In addition to providing a basic overview of the rules and briefly explaining why it might be advantageous to make various of the available elections, CRA makes the following administrative announcements:
- Although the EIFEL reporting is required to be made largely on Sched. 130, this form is not yet available. However, CRA still requires the same information to be provided to it with the return, and explains the procedures it would like to be followed in this regard pending its release of the Schedule.
- The various election forms are also not available, so that, until then, a separate election should be sent in for each election.
- Although s. 18.2(6) requires the transferee of cumulative unused excess capacity pursuant to a joint election with the transferor to file an information return, CRA states that it “is not requiring the filing of this information return at this time.”
Neal Armstrong. Summaries of CRA Webpage, “Excessive interest and financing expenses limitation rules,” 24 September 2024 under s. 18.2(18), s. 18.2(4), s. 18.2(16), s. 18.2(1) – specified pre-regime loss, and s. 95(2)(f.11)(ii)(E).
Income Tax Severed Letters 25 September 2024
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CPA Canada identified deficiencies in the draft capital gains legislation which were addressed in the September 23, 2024 Notice of Ways and Means Motion
CPA Canada identified issues in the August 12, 2024 draft capital gains inclusion rate legislation, which Finance took into account in the Notice of Ways and Means Motion that was released on September 23, 2024 (“WMM”). Some of these points were:
- The formulae in ss. 13(7)(b), (d) and (e) for computing the step-up in the capital cost of depreciable property where there has been a full or partial change of use or a non-arm’s length transfer produced illogical results. (These formulae were corrected in the WMM.)
- Variable E of the formula in s. 38.01 (allowing an election for the $250,000 threshold to be used for capital gains of an individual from dispositions or deemed dispositions described in any of s. 13(7)(b), (d) or (e)) seemed to allow a taxpayer which had acquired capital property and made a joint election with the transferor under 13(7.7) to deduct up to 50% of the amount covered by the election even though such transferee realized no gain on the transfer. Variable E referred to the amount covered under the election but seemed to apply both to the transferor and transferee. (This is corrected in the WMM by adding a reference in E to the elected amount being an amount relating to a capital gain of the taxpayer under s. 13(7)(b), (d) or (e)).
- Regarding, for example, Aco (with a June 30, 2024 taxation year-end) which was a member of a partnership (with a March 31, 2024 taxation year end) which realized a capital gain on March 1, 2024, given the absence of a rule to deem partners of a partnership with a taxation year ending before June 25, 2024 to have realized any allocated capital gains from the partnership in Period 1, Aco would have a capital gains inclusion rate of 2/3. (The WMM addressed this by adding a further transitional rule: s. 96(1.73).)
Neal Armstrong. Summaries of CPA Canada, “Summary of Issues Identified: Capital Gain Inclusion Rate Draft Legislation,” 3 September 2024 CPA Canada submission under s. 13(7)(e), s. 38.01(b) – E, and s. 96(1.72).
CPA Canada indicates that there is insufficient scope to the s. 15(2.01) exceptions to s. 15(2)
Notwithstanding the expansion in s. 15(2.01) of the August 12, 2024 draft legislation of the exceptions to the application of s. 15(2) to debt, there continues to be uncertainty regarding the potential application of s. 15(2) to commonly encountered situations involving debts owing by a foreign corporation below a partnership given inter alia that the deeming rule in s. 93.1(1) for shares of a foreign corporation held through a partnership does not extend to s. 15(2).
An example would be two non-arm’s length corporations resident in Canada (CRICs) which are the sole members of a partnership (P1) wholly-owning a foreign corporation (Forco1) that in turn wholly-owns each of two foreign corporations (Forco2 and Forco3) that are the sole members of a second partnership (P2). There would be a concern that s. 15(2) could apply to a loan made by one of the CRICs to P2 given inter alia that the two Forco partners are not foreign affiliates.
Neal Armstrong. Summary of CPA Canada, “Submission regarding Technical Amendments Legislation in Budget 2024 included in the August 2024 Draft Legislation,” 11 September 2024 CPA Canada submission under s. 15(2.01).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in July and June of 2001. Their descriptors and links appear below.
These are additions to our set of 2,952 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 23 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
The Joint Committee explains why the sledgehammer approach of Finance to encouraging compliance with requirements for information is unconstitutional
S. 231.9(1) (included in August 2024 draft legislation) allows the Minister to send or serve a person with a notice of non-compliance (NNC) regarding a s. 231.1. 231.2 or 231.6 requirement (a “Requirement”). The recipient may, within 90 days of receipt, request the Minister (pursuant to s. 231.9(4)) to review the NNC. Pursuant to s. 231.9(6) the Minister must vacate the NNC if she determines that it was “unreasonable” to issue the NNC or that the person had, prior to the issuance of the NNC, done everything reasonably necessary to comply with each relevant Requirement. If the NNC is instead confirmed, the person may apply (pursuant to s. 231.9(8)) for judicial review of such decision, and the Federal Court may (pursuant to s. 231.9(9)(b)) vary or vacate the NNC if it determines that the Minister’s decision “was not reasonable.”
Concerns expressed by the Joint Committee regarding s. 231.9 include:
- Where the taxpayer refuses to provide information on the basis of solicitor-client privilege and the Minister nonetheless issues a NNC, this could pressure the taxpayer into waiving privilege rather than undertaking the onerous NNC dispute process – suggesting that since a compelled waiver is not valid, the production of documents resulting from the NNC’s issuance would likely constitute an unreasonable search or seizure contrary to s. 8 of the Charter.
- Even if s. 231.9(6) or (9) authorizes the Minister or the Federal Court on an appeal under s. 231.9(4) or (8) to evaluate the legality of the Requirement or whether the taxpayer was required to comply with it, evaluation of the legality of the Requirement or of the taxpayer’s s. 7 or 8 Charter right to refuse to comply with it are questions of law “’that are of fundamental importance and broad applicability’, with significant legal consequences for the justice system as a whole or for other institutions of government”, subject to review on a standard of correctness (Vavilov, at paras. 59-62).
- This requirement for a review of correctness clashes with s. 231.9(9), which contemplates the Federal Court reviewing whether any CRA decision to reject a privilege claim in relation to a document covered by a NNC was reasonable, a review which generally would be limited to considering that decision in light of the material before the CRA decision maker – which, crucially, would not include the document for which privilege was claimed.
- In contrast, the Federal Court’s review under s. 231.7 of any compliance order sought by the Minister of a document for which the taxpayer claimed privilege would be applied under a correctness standard (likely including a review of the document) – so that there could be a situation (representing an affront to the rule of law) in which taxpayer was penalized under s. 231.9 for what was subsequently established not to be a failure.
- Regarding the requirement in s. 231.9(6) for the Minister to vacate a NNC where the taxpayer had “done everything reasonably necessary to comply with each [relevant] requirement,” a taxpayer taking reasonable steps to comply with a requirement should not be subjected to the s. 231.9(12) penalty merely because the Minister, with the benefit of hindsight, points to alternative actions which the taxpayer might have taken.
- For example, if CRA issues a Requirement (with a 30-day deadline) asking for a copy of a share purchase agreement concluded 30 years earlier (relevant to the ACB of shares) and the taxpayer, believing that such agreement would be at an off-site storage site, searches such records and does not locate the agreement and so reports to CRA, who then issues a NNC, it might be inappropriate in the circumstances for the Minister to then determine that the taxpayer did not do everything reasonably necessary because it did not request a copy of the agreement from the law firm which assisted on the original purchase.
Draft s. 231.7(6) provides for the automatic imposition of a penalty against a person where the Federal Court has issued a compliance order under s. 231.7(1), equal to 10% of the aggregate amount of tax payable by the taxpayer for each year in respect of which the compliance order was issued (provided that such tax is at least $50,000.) Concerns expressed include:
- A penalty that is “out of proportion to the amount required to achieve regulatory purposes” may constitute a true penal consequence engaging the criminal procedural protections of s.11 of the Charter (Guindon, at para. 77).
- To illustrate the disproportionate nature of the automatic penalty under s. 231.7(6), consider a corporation which provided 95 out of 100 documents requested regarding an audit of three taxation years, and claimed solicitor-client privilege for the other 5 documents and, in connection with CRA seeking a compliance order, the Federal Court determines that there was insufficient evidence to establish that two of the documents were privileged: even though the corporation was substantially compliant, it is subjected to the penalty of 10% of its tax for the three years.
- To provide another example, where CRA obtains a compliance order regarding the refusal of an insurance company, with annual taxes of $100M to provide information relating to a potential dispute (involving, say, $1M in taxes) between a client of the insurance company and CRA, on the grounds that CRA had failed to obtain a judicial authorization pursuant to s. 231.2(2), the resulting penalty of $10M is grossly disproportionate to the conduct of the insurance company.
- Where the threat of penalties compels production of documents which CRA is not entitled to obtain, the demand therefor constitutes an unreasonable search and seizure contrary to section 8 of the Charter.
Neal Armstrong. Summaries of Joint Committee, "Submission regarding proposed audit powers in Budget 2024 included in the August 2024 Draft Legislation", 11 September 2024 Joint Committee Submission under s. 231.41, s. 231.9(6), s. 231.7(6), and s. 231.8(1).
Joint Committee comments on the August 12 Technical Amendments to the trust reporting rules
Recommendations of a Joint Committee subcommittee on the August 12, 2024 technical amendments to ss. 150(1.2) to (1.31) include:
- The exception in s. 150(1.2)(a) for trusts that had been in existence for less than three months at the end of the year should be explicitly extended to trusts that were created and wound-up within three months at any time in the year.
- The exception in s. 150(1.2)(b.1) for trusts with related trustees would not extend to trusts with other family trustees such as aunts or nephews, and the permitted assets should be expanded to include near-cash items (such as gold coins), GICs of credit unions and listed limited partnership units.
- Regarding the requirement respecting the exception in s. 150(1.2)(c) for lawyer trust accounts that, if the trust account is held for a specific client, the only asset must be “money” not exceeding $250,000, the “money” concept should be expanded to near-cash assets.
- The exception in s. 150(1.2)(n) for Canadian registered plans should be extended to exempt foreign plans (e.g., IRC 529 plans, 401(k)s, or Roth IRAs) or exempt RCAs.
- The deemed express trust rule in s. 150(1.3) is broad and might extend to landlord/tenant or licensor/licensee relationships under which one party can act as agent for the other in relation to property held by it.
- Regarding the exceptions from s. 150(1.3) contained in s. 150(1.31), the exception in s. 150(1.31)(a) for where each deemed beneficiary is also a legal owner and there are no legal owners that are not deemed to be beneficiaries seems not to apply once a legal (and beneficial) owner dies or for a “Sawdon” or “Pecore” arrangement, where an individual has legal ownership but beneficial ownership will not vest until later.
- Regarding the exception in s. 150(1.31)(d) for property which is held throughout the year for a partnership, it is legally owned by a general partner and the partners generally are required to file information returns, the “throughout the year” requirement should be removed.
Neal Armstrong. Summaries of Joint Committee, “Trust Reporting,” 11 September 2024 Joint Committee Submission under s. 150(1.2), s. 150(1.3) and s. 150(1.31).
CRA provides an example of the application of the accelerated investment incentive CCA rules and clean ITC rules to solar panel acquisitions
CRA provided an extended example to illustrate the application of the accelerated investment incentive (AII) per Reg. 1100(2) and the “clean tech” ITC under s. 127.45(1) to the acquisition of solar panels. The taxpayer acquired solar panels (as its only relevant acquisitions) for $20M in 2024 (but with their not becoming available for use until January 2025) and acquired and deployed more such panels in 2027 for $10M. The specified energy property rules did not apply.
CRA noted that because the $20M of property was acquired before 2025, it would be a Class 43.2 property (50% CCA rate) rather than a Class 43.1 property (30% CCA rate) even though no CCA could be claimed until 2025 due to the available-for-use rules.
Its CCA claim for 2025 would be calculated as follows:
| Capital cost | $20M |
| AII per Reg. 1100(2) – A - (c)(ii) (i.e., 1/2 X $20M) | $10M |
| Subtotal | $30M |
| CCA (50% Class 43.2 rate) | $15M |
The clean tech ITC for 2027 would be 20% of the capital cost of $20M, or $4M.
The CCA claim for 2027 would consist of a small ($0.25M) claim for the Class 43.2 property (reflecting a UCC deduction for the 2025 ITC claim in addition to the 2025 and 2026 CCA claims) plus CCA regarding the $10M Class 43.1 acquisition calculated as follows:
| Capital cost | $10M |
| AII per Reg. 1100(2) – A - (b)(iii) (i.e., 5/6 X $10M) | $8.33M |
| Subtotal | $18.33M |
| CCA (30% Class 43.2 rate) | $5.5M |
The clean tech ITC for 2027 would be 20% of the capital cost of $10M, or $2M.
Neal Armstrong. Summary of 24 June 2024 External T.I. 2023-1000861E5 under Reg. 1100(2) – A.
CRA releases the 2024 IFA Roundtable
CRA has provided its official written responses to the questions posed at the May 15, 2024 IFA Roundtable. For convenience of reference, the table below provides links to those answers and to summaries that we prepared in May.
| Topic | Descriptor | |
|---|---|---|
| 15 May 2024 IFA Roundtable Q. 1, 2024-1007651C6 - Principal purpose test and the UK-Canada Tax Treaty | Treaties - Income Tax Conventions - Article 10 | marginally increasing a shareholding to access the Treaty-reduced rate likely would not engage the PPT |
| Treaties - Multilateral Instrument - Article 7 - Article 7(1) | a non-resident’s increasing its voting shareholding in Canco to access the Treaty-reduced dividend withholding rate likely does not engage the PPT | |
| 15 May 2024 IFA Roundtable Q. 2, 2024-1007541C6 - Foreign Entity Classification | Income Tax Act - Section 248 - Subsection 248(1) - Corporation | treatment of Luxembourg SCS or SCSp as a partnership |
| Income Tax Act - Section 96 | Luxembourg SCS or SCSp may be a partnership | |
| 15 May 2024 IFA Roundtable Q. 3, 2024-1007631C6 - Cash Pooling and Notifiable Transactions | Income Tax Act - Section 237.4 - Subsection 237.4(1) - Advisor | whether a professional firm is an advisor turns inter alia on its degree of responsibility for the tax advice etc. |
| Income Tax Act - Section 237.4 - Subsection 237.4(4) | full disclosure of one transaction (e.g., an interest payment) for the series of transactions is sufficient | |
| Income Tax Act - Section 237.4 - Subsection 237.4(2) | cash-pooling arrangement is substantially similar to the back-to-back designated transaction if the Canadian taxpayer as debtor does not withhold on the basis of the higher withholding rate for the ultimate lender | |
| 15 May 2024 IFA Roundtable Q. 4, 2024-1007571C6 - Late-filed PLOI election | Income Tax Act - Section 212.3 - Subsection 212.3(12) | revised procedures for the filing of late PLOI elections |
| Income Tax Act - Section 15 - Subsection 15(2.12) | revised procedure for filing late PLOI election under s. 15(2.12) | |
| 15 May 2024 IFA Roundtable Q. 5, 2024-1007581C6 - Late-filed PLOI election and reassessment of the affected taxation year(s) | Income Tax Act - Section 212.3 - Subsection 212.3(12) | late filing of PLOI election is coupled with an extended reassessment period for the s. 17.1(1) deemed interest |
| Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(iii) - Clause 152(4)(b)(iii) | a late-filing of a PLOI election does not cause the related deemed interest to be statute-barred | |
| 15 May 2024 IFA Roundtable Q. 6, 2024-1007591C6 - PLOI Election Administrative Relief | Income Tax Act - Section 15 - Subsection 15(2.11) - Paragraph 15(2.11)(d) | CRA effectively indicates that to disengage a single PLOI election, the loan agreement must be replaced |
| Income Tax Act - Section 212.3 - Subsection 212.3(11) - Paragraph 212.3(11)(c) | irreversibility of choice to make a single election unless a separate loan agreement is entered into | |
| 15 May 2024 IFA Roundtable Q. 7, 2024-1007641C6 - Principal Purpose Test in the Multilateral Instrument | Treaties - Income Tax Conventions - Article 10 | application of PPT where Treaty-resident pure holdco with ultimate Treaty-resident parent received Canco dividends |
| Treaties - Multilateral Instrument - Article 7 - Article 7(1) | PPT application to a treaty-reduced dividends of Canco paid to a pure Holdco with an ultimate Treaty-resident parent |
Neal H. Armstrong editor and contributor