News of Note
The joint acquisition by Intact and Tryg of a UK multinational target entailed unwinding a sandwich structure using s. 212.1(4) and a Danish demerger transaction
Email this ContentAn article by Carrie Smit and Tommy Friedlich and the public documents referenced by them illuminate the transactions on which CRA ruled in 2020-0875391R3.
Intact, a Canadian public company insurer, and Tryg, a Danish public company insurer dealing at arm’s length with Intact, engaged in co-ordinated transactions to acquire a U.K. target (RSA, a U.K. public company multinational) so that: Intact retained RSA’s Canadian business and certain other international businesses; Tryg acquired the RSA Scandinavian businesses; and Intact and Tryg initially jointly owned RSA’s Danish business and subsequently sold it to an arm’s length party (Alm Group). An indirect U.K. subsidiary of RSA held a Canadian subsidiary (RSA Canada), i.e., there was a sandwich structure.
RSA was acquired by a UK Bidco owned exclusively “beneath” Intact notwithstanding that over half of the funding was provided by Tryg. The Tryg portion of the funding was paid to the direct shareholder of the UK Bidco on account of the purchase price payable by Tryg for the Scandinavian companies that were transferred to it postclosing.
CRA ruled that s. 212.1(4) would not apply to the transfer of RSA Canada by its UK shareholder to Intact such that s. 212.1(1.1)(a) would not deem a dividend to be paid by RSA Canada to that shareholder. CRA accepted that, notwithstanding the funding by Tryg of more than 50% of the acquisition, Tryg did not control RSA and its subsidiaries (including the UK shareholder of RSA Canada) and dealt at arm’s length with Intact.
At the acquisition time, RSA indirectly held a “Danish Opco,” which indirectly held both “keeper” and “non-keeper” businesses, CRA gave detailed and favourable rulings on the application of the s. 15(1.5) demerger rules to a division of Danish Opco between a Demergerco 2 and Demergerco 1 (which was to be sold to Alm Group).
Neal Armstrong. Summary of Intact Financial Corporation (“Intact”) Business Acquisition Report 51-102F4, Form 51-102F3 Material Change Report, Material Document, Co-operation Agreement dated 18 November 2020, Carrie Smit and Tommy Friedlich, “Conquer and Divide: The CRA Rules on a Foreign Acquisition, Reorganization, and Demerger Transaction,” International Tax Highlights (IFA), Vol, 3, No. 2, May 2024, p. 16 and 2021 Ruling 2020-0875391R3 under Public Transactions - Mergers & Acquisitions - Cross-Border Acquisitions - Outbound – Other.
CRA publishes a revised webpage on the mandatory disclosure rules
CRA has expanded its Webpage on the mandatory disclosure rules:
- The fee is paid by an insurance professional to a client’s advisor for a referral regarding a proposed policy to fund taxes arising on death, or the fee is paid by the advisor to the insurance professional for the referral of the estate freeze work, generally will not come within the contingent fee arrangements hallmark.
- In the context of its safe harbour from the contractual protection hallmark for traditional representations and warranties insurance policies, that are generally obtained in the ordinary commercial context of mergers and acquisitions transactions to protect a purchaser from pre-sale liabilities (including tax liabilities), it has added the comment:
For greater clarity, the contractual protection hallmark would not arise solely where the insurance or indemnity is based on the actions or inactions of a person to achieve a tax result.
- A standard indemnity clause in the trust terms protecting a trustee also will not generally come within this hallmark, provided that when the clause was created it was not reasonable to conclude that an aggressive tax avoidance transaction was contemplated.
- CRA has essentially finalized its position at the 2024 IFA Roundtable, Q.3 regarding the application of NT-2023-05 (re back-to-back arrangements) to cash pooling arrangements. It states:
In the context of a cross-border [physical or notional] cash pooling arrangement involving a Canadian taxpayer, non-arm’s length non-residents, and an arm’s length intermediary, assuming that the Canadian taxpayer is a debtor and at least one non-resident member of the pool resides in a jurisdiction with a higher interest withholding tax rate than the rate applicable to the intermediary, the arrangement would be a notifiable transaction [described in NT-2023-05] and results in a filing requirement where:
- the taxpayer files or anticipates filing its income tax returns on the basis that the debt or other obligation owing by it, and the interest paid thereon, is not subject to the thin capitalization rules, or
- the taxpayer reports or is expected to report that the interest it pays in respect of the arrangement is subject to the lower rate of withholding tax applicable to the intermediary.
A filing generally is not required where the Canadian taxpayer participating in the cash pooling arrangement is solely a creditor … .
[T]he filing of Form RC312 by a person in respect of the earliest transaction in the series of transactions forming the cash pooling arrangement will satisfy that person’s reporting obligation in respect of each transaction that is part of the series.
Neal Armstrong. Summaries of “Mandatory disclosure rules – Guidance,” 15 August 2024 CRA Webpage under s. 237.3(1) – reportable transaction – (a), contractual protection and s. 237.4(3).
CRA publishes 3 new Memoranda on the ETA place-of-supply rules
CRA has published three GST/HST Memoranda on the provincial place-of-supply rules, partially supplanting parts of Technical Information Bulletin B-103 (draft).
CRA provides some helpful illustrations of its view of the operation (or non-operation) of ETA Sched. IX, Pt. II, s. 3(a), which departs from the usual rule of the place of supply being that of legal delivery where the vendor (say, in PEI) delivers the goods onto a common carrier which it has retained on behalf of the purchaser (say, in Manitoba), so that the place of supply is the location of the ultimate delivery in Manitoba rather than of the legal delivery of the goods to the carrier in PEI. A CRA example indicates that where the common carrier was retained by the Manitoba purchaser, this rule will not apply so that the place of supply is the place of legal delivery (to the purchaser’s common carrier) in PEI, even if the purchaser instructed the vendor to directly contact the carrier when the goods were ready to be picked up.
A second example illustrates the CRA view that a consignment sale entails two supplies. Where the Manitoba supplier personally delivers goods to the consignee in Ontario, who sells the goods to a Quebec purchaser and sends the goods by courier to Quebec, there are two supplies: in Ontario (the place of delivery to the consignee); and Quebec (by virtue of the courier rule in Sched. IX, Pt. II, s. 3(b).)
CRA illustrates the “reasonably attributable” apportionment rule in ETA s. 136.2 with an example of the proration of single option to buy two real estate properties in two different provinces based on the properties’ relative values.
Neal Armstrong. Summaries of GST/HST Memorandum 3-3-2, Place of Supply in a Province – Overview, August 2024 under New Harmonized Value-added Tax System Regulations. s. 8, GST/HST Memorandum 3-3-4, Place of Supply in a Province – Real Property, August 2024 under ETA, s. 136.2 and s. 136.1(1) and GST/HST Memorandum 3-3-3, Place of Supply in a Province – Tangible Personal Property, August 2024, ETA Sched. IX, Pt. II, s.1 and s. 3.
CRA accepts a wide meaning of “wood waste”
The definition of “wood waste” in Reg. 1104(13) feeds the definition of “specified waste materials” which, in turn, was added consequentially to amendments to expand eligibility for Classes 43.1 and 43.2 to equipment used to convert specified waste materials into liquid and solid biofuels. The “wood waste” definition states that that term includes:
scrap wood, sawdust, wood chips, bark, limbs, saw-ends and hog fuel, but does not include spent pulping liquor and any waste that no longer has the physical or chemical properties of wood.
CRA confirmed that “wood waste” includes waste generated from (i) forestry operations, including slash piles, (ii) provincially/territorially regulated forest management activities that support improving the health of forest stands and forest fire resiliency (e.g., residues from stand thinning, salvaged wood from fire/pest affected stands, residues from fire smarting), and (iii) construction and demolition activities.
In this regard, it stated that “there is no inherent limitation to the activity or process from which the waste is generated” and that:
[I]t appears as though “wood waste” would generally mean an unwanted material or by-product that would otherwise be discarded and that consists of the substance that is found in parts of trees, shrubs, etc. …
Neal Armstrong. Summary of 2023-1000061E5 under Reg. 1104(13) - “wood waste.”
Income Tax Severed Letters 13 August 2024
This evening's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that s. 13(7.1) (or s. 53(2)(k)) overrides the application of s. 12(1)(x) re government assistance to construct or repair affordable housing
Aco will receive a grant (the “Government Assistance”), described under s. 12(1)(x)(iv), from a Crown corporation for the purpose of creating or repairing affordable housing.
CRA indicated that to the extent that the Government Assistance received by Aco was in respect of the acquisition of depreciable property (or land), s. 13(7.1) (or s. 53(2)(k)) will deem that amount to reduce the capital cost of the depreciable property (or land) – without any inclusion under s. 12(1)(x) pursuant to s.12(1)(x)(vi) and (in contrast with s. 13(7.4) or 53(2.1)) without any election required. The cost of depreciable property for these purposes includes any “capital expenditures (as opposed to current expenses) related to the construction of new affordable housing, or to convert existing buildings into affordable housing.”
To the extent that the Government Assistance was used to fund an expense that was otherwise fully deductible (e.g. landscaping under s. 20(1)(aa), investigation costs under s. 20(1)(dd), disability related modifications to buildings in accordance with s. 20(1)(qq), salary and certain repairs and maintenance under s. 9(1)), Aco could elect under s. 12(2.2) to reduce the expense by that amount (otherwise, there would be a s. 12(1)(x) inclusion – which would not matter because Aco could then deduct the related expense.)
Neal Armstrong. Summaries of 16 February 2024 External T.I. 2023-0984301E5 under s. 13(7.1) and s. 12(2.2).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in September of 2001. Their descriptors and links appear below.
These are additions to our set of 2,916 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 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Onex – Federal Court finds that CRA should consider, in light of the remedial nature of ss. 220(2.1) and (3), that they could be used to accommodate a late election not listed in Reg. 600
In 2014, Bill C-43, which amended the FAPI rules in relation to partnerships, provided that the new rules would apply to taxation years ending after July 12, 2013, unless the taxpayer elected, under Bill C-43, to have the amendments be deemed to have come into force on January 1, 2010. The applicants (“Onex”) concluded that, based on their structure, they had already achieved the purpose of these amendments (as already reflected in returns filed for 2012 and 2013) and did not make the election. In June 2020, CRA reassessed the Onex returns for 2012 and 2013 to add over $190 million in taxable income, on the basis that the retroactive election had not been made. Onex then sought the authorization of the Minister pursuant to s. 220(2.1) to waive the requirement to file the election, in order for Onex to benefit from the amendments for its 2012 and 2013 taxation years or, alternatively, permission to file new returns for those years, under s. 220(3), so as to amend its earlier 2012 and 2013 returns and also make the election contemplated by Bill C-43.
In rejecting the Minister’s submission that the Bill C-43 election provision was not a part of the Act, so that the Minister did not have the discretion under the terms of s. 220(2.1) of the Act to waive the timely filing of an election under those Bill election provisions, Régimbald J noted that s. 42(3) of the Interpretation Act provided that “An amending enactment, as far as, consistent with the tenor thereof, shall be construed as part of the enactment that it amends” and that this submission was also inconsistent with s. 12 of that Act, favouring a remedial interpretation. He also noted that:
[T]he specific terms of subsection 220(2.1) do not specifically limit the Minister’s discretion to the waiving of the filing of “designations” but not of “elections,” nor limit the Minister’s discretion to only accept the waiver of documents that do not require a “decision.”
Regarding the Minister’s position that filing the election was not tied to the filing of a return, as required for s. 220(3) to apply, Régimbald J noted that, substantively, the effect was to amend the T5013 returns of the taxpayer, that per Bonnybrook s. 220(3) extended to documents other than returns and that CRA’s restrictive interpretation in this regard failed to take into account the remedial nature of s. 220(3).
Regarding the CRA position that the implied exclusion rule of statutory interpretation indicated that Parliament did not intend ss. 220(2.1) and 220(3) to be used to allow the late filing of an election that was not listed pursuant to s. 220(3.2) under Reg. 600, Régimbald J indicated that s. “220(3.2) may serve a different purpose and grant an additional and different type of relief to taxpayers, in relation to some specific types of elections” and that CRA had failed to consider this more remedial interpretation.
Regarding the CRA position that, even if it had the discretion under s. 220(3) to accept the filing of a new T5013 return, no extension was appropriate, Régimbald J found that CRA had failed to consider inter alia that its reassessment “would create injustices” given Onex’s representations that “they always intended to benefit from the ultimate tax result now provided by Bill C-43, and that their request was not an attempt at retroactive tax planning” – and that CRA had “failed to explain why, in its view, the ‘harsh consequences’ in this case better reflected Parliament’s intention”.
He set aside the Minister’s decision and remitted it back for reconsideration in light of his reasons.
Neal Armstrong. Summaries of Onex Corp. v. A. G. Canada, 2024 FC 1247 under s. 220(3) and Interpretation Act, s. 42(3).
Delays in getting a s. 116 certificate may necessitate a second CRA comfort letter
Given that CRA generally will not provide a vendor of taxable Canadian property with a clearance certificate before the remittance deadline specified in s. 116(5) (i.e., within 30 days of the month end of the acquisition), the vendor typically obtains a CRA comfort letter, which might state:
We are reviewing the application for a Certificate of Compliance. Please hold in trust, for the Receiver General, the tax withheld for the vendor as required by subsection 116(5) and/or 116(5.3) of the Income Tax Act until we finish our review. We will let you know how much tax is owing.
As long as we receive the payment within the time frame provided, we will not charge penalty and interest under subsections 227(9) and (9.3).
The certificate also might not be received by the balance-due date for the taxation year of the vendor in which the disposition occurred (usually, the end of February of the following year). If so, the non-resident vendor might typically request the purchaser to remit the requisite portion of the s. 116 escrow funds to CRA as an instalment of the purchaser’s liability under s. 116(5).
However, a cautious purchaser might be concerned that such a partial remittance would be contrary to the comfort letter, whose wording does not contemplate any remittances until a CRA request. This would generally result in the vendor being required to obtain, before the balance-due day, written confirmation from the CRA that a partial remittance by the purchaser of the s. 116 escrow tax will be applied as an instalment of the purchaser’s s. 116(5) liability.
Neal Armstrong. Summary of Wade Ritchie and Anu Nijhawan, “Section 116 Withholding Tax in Escrow: How Does a Vendor Pay Its Tax on Its Balance-Due Day?” International Tax Highlights, Vol. 3, No. 2, May 2024, p. 20 under s. 116(5).
CRA discusses the withholding tax rules applicable to a Canadian corporation that is a deemed U.S. resident under the anti-inversion rules
Regarding a corporation (the “Inverted Payer Corporation”) incorporated under the laws of Canada that is subject to the “anti-inversion rules” in IRC §7874(b) (so that it is resident in the U.S. for IRC purposes), the Directorate indicated that under the “tie-breaker” rule in Art. IV(3) of the Canada-U.S. Convention (the “Convention”), the Inverted Payer Corporation is resident for Convention purposes in Canada because it had been incorporated there, so that s. 250(5) would not apply to deem it to be a non-resident. Accordingly:
- Dividend payments made by the Inverted Payer Corporation to a U.S. resident would be subject to Part XIII tax and to potential treaty-rate reductions in accordance with the normal rules (and dividend payments made to other non-residents also would be subject to Part XIII tax subject to any applicable treaty reduction).
- No Part XIII tax would apply to dividends paid by it to Canadian residents (including to any other such Inverted Payer Corporation).
- Dividends paid by it to a Canadian resident would be Canadian-source income, so that the resident would not be entitled any foreign tax credit for the U.S. withholding tax on such dividends if it does not have other sources of U.S. non-business income.
- Although Art. X(5) of the Convention bars the U.S. from taxing such dividends, IRC §7874(f) provides that the anti-inversion rules apply despite U.S. treaty obligations, and a U.S. court would respect this treaty override.
Neal Armstrong. Summary of 6 February 2024 Internal T.I. 2022-0936261I7 under Treaties – Art. 4.
Neal H. Armstrong editor and contributor