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Income Tax Severed Letters 23 August 2017

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

Flow-through share issues may need to be addressed in an M&A transaction with a principal business corporation

Flow-through share (FTS) issues arising in an M&A context include:

  • Where a merger agreement has been signed between the target principal business corporation (PBC) and an acquiror and the target thereafter issues FTS, those FTS could be prescribed shares under Reg. 6202.1(1)(d).
  • Somewhat similarly, given an apparent CRA position that s. 84(9) can apply to deem FTS to be disposed of, on an amalgamation, to the PBC, FTS which are issued after the announcement of a long-form amalgamation may result in a prescribed share issue under Reg. 6202.1(1)(d).
  • It could be argued that since a corporation is not wound up until it is dissolved rather than the earlier time that it makes a winding-up distribution of its business to its parent, the continuity rule in s. 88(1.5) does not work during this gap in time.
  • It is unclear whether the continuity rule in s. 87(4.4) works where, on an amalgamation, the amalco issues a replacement share to someone who had acquired the “old” FTS from someone who, in turn, had acquired the FTS from the original subscriber, i.e., there are two subsequent purchases of the FTS rather than only one.

In private discussions, CRA:

confirmed that the subscription agreement need not restrict damages to additional federal and provincial taxes payable, as the CRA considers a general common law right to sue for damages otherwise available as not constituting a prescribed share issue.

Some Alberta decisions effectively confirm that the FTS holder's contractually-provided right to damages for addition taxes disappears on a CCAA compromise.

Neal Armstrong. Summaries of Gregory M. Johnson and Wesley R. Novotny, “An Update on Flow-through Shares in the Energy Sector” 2016 CTF Annual Conference draft paper under s. 66(15) - flow-through share, Reg. 6202.1(1)(d), s. 88(1.5), s. 87(4.4)(d)(i), Reg. 6202.1(1.1)(c), Reg. 6202.1(5) - excluded obligation, s. 66(12.73), s. 163(2.21).

Six further full-text translations of CRA technical interpretations/Roundtable items are available

Full-text translations of the final three items from the October 10. 2014 APFF Roundtable, and of three technical interpretation released on November 19, 2014, are listed and briefly described in the table below.

These (and the other translations covering the last 33 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2014-11-26 10 October 2014 APFF Roundtable Q. 20, 2014-0534671C6 F - D&D Livestock Income Tax Act - Section 245 - Subsection 245(4) unjustified duplication of fiscal attributes is abusive
Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) - Subparagraph 55(2.1)(b)(i) CRA is concerned by planining that can result in an unjustified duplication of fiscal attributes including ACB
2014-11-19 30 June 2014 Internal T.I. 2013-0508411I7 F - Part IV Tax and the Dividend Refund Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) failure to circularly calculate Part IV tax and dividend refund is neglect given published TIs
Income Tax Act - Section 186 - Subsection 186(1) when to stop circular calculation for cross dividends arising after tuck under
6 October 2014 External T.I. 2014-0543751E5 F - Rollover of a part of an interest in a partnership Income Tax Act - Section 85 - Subsection 85(1.1) fractional partnership interest qualifies as eligible property
Income Tax Act - Section 248 - Subsection 248(1) - Property partnership interest is one property - but fraction thereof also is property if transferred
17 October 2014 Internal T.I. 2014-0535121I7 F - Hypothèque et créance irrécouvrable Income Tax Act - Section 50 - Subsection 50(1) second mortgagee not entitled to deduction as it did not exercise its remedies
10 October 2014 APFF Roundtable, 2014-0538141C6 F - Interest deductibility Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) interest on mortgage assumed on devise of land to beneficiary considered as amount payable for the property
10 October 2014 APFF Roundtable, 2014-0538021C6 F - Meaning of beneficiary Income Tax Act - Section 248 - Subsection 248(25) Propep applied: beneficiary under s. 55(5)(e)(ii) included beneficially interested per s. 248(25)(a)
Income Tax Act - Section 55 - Subsection 55(5) - Paragraph 55(5)(e) - Subparagraph 55(5)(e)(ii) beneficiary under s. 55(5)(e)(ii) includes beneficially interested under s. 248(25)(a)

Tembec is to be acquired by Rayonier AM or a sub of Rayonier AM for 2/3 cash and 1/3 Rayonier AM shares

Tembec, which is a TSX-listed CBCA corporation, agreed to a CBCA Plan of Arrangement with NYSE-listed Rayonier AM under which its (common) shares were to be acquired by Rayonier AM for consideration (at each Tembec shareholder’s option) of C$4.75 cash or 0.2542 of a Rayonier AM common share – except that proration would occur so as to result in the overall consideration being more or less fixed at 67% cash and 33% shares. However, the Plan of Arrangement specifies that Rayonier AM may designate a direct or indirect wholly-owned subsidiary to effect the acquisition. If this does not occur, then a large Delaware corporation (Rayonier AM) will be subject to obligations, such as to deliver shares in its capital, under a CBCA Plan of Arrangement.

19.9%, 18.0% and 15.9% of the Tembec shares were held by two US LPs and by Fairfax. The two US LPs, but not Faifax, were parties to the support agreement. The transaction will occur on a non-rollover basis for both Canadian and U.S. purposes, and no provision for exchangeable shares was made. For reasons that are not indicated, some preliminary steps in the Plan of Arrangement include a drop-down of assets of one subsidiary (Mattagami Railroad Company) into another subsidiary.

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

CRA states that new home HST rebate forms can be signed electronically

CRA is amenable to new home HST rebate applications, that are provided electronically to the home purchasers, being signed electronically using a digital stylus pen, so that the forms can be stored and transmitted by the builder in electronic form.

Neal Armstrong. Summary of 23 May 2017 Interpretation 182665 under ETA s. 254(5).

CRA indicates that where a GST/HST rebate claimant has underclaimed, it can request an assessment of the claim

Where a public sector body subsequently realizes that it claimed an inadequate rebate respecting a particular transaction for a particular claim period, ETA s. 262(2) prohibits it from filing a second PSB rebate claim in a subsequent claim period for the missed amount in respect of that same matter (i.e., unlike input tax credits, unclaimed rebates cannot be carried forward), and it is also prohibited from filing a second rebate application for the same claim period under ETA s. 259(6). However, CRA states:

CRA could exercise its discretion and reassess the prior rebate claim to add the amount to the PSB rebate claim for the correct claim period.

Alternatively, an applicant can file an objection to the assessment of its initial rebate application requesting that a missed amount be allowed and/or an adjustment be made for a misstated amount.

If the time limit for objecting has passed, the person can write in and ask for a reassessment of the rebate claim for the particular claim period. …

Furthermore, if an auditor is assessing net tax for the claim period in question, an allowable unclaimed rebate amount for that period must be applied against the assessment of net tax.

If this is missed by the auditor when assessing the person, then CRA can apply the eligible unclaimed rebate amount where an objection has been filed by the person.

Neal Armstrong. Summaries of 22 June 2017 Interpretation 180966 under ETA s. 262(2), s. 296(2), s. 296(2.1), s. 261.4(1)(c) and s. 297(4).

A cross-border butterfly used a 4-party exchange

CRA has now published a ruling issued four years ago on a relatively simple cross-border butterfly of a Canadian spin business (already packaged into a subsidiary of DC) by DC to TC, an indirect subsidiary of Foreign SpinCo, before Foreign SpinCo was distributed up the chain for inclusion in the assets of New Foreign PubCo, which would then be dividended by the current parent (Foreign PubCo) to its public shareholders. Ironically, DC was the product of a prior amalgamation of two corporations carrying on the Canadian spin and keep businesses, respectively.

Rather than using the usual 3-party exchange in order to avoid the application of s. 55(3.2)(h) (see Desjardins and Diksic), here a 4-party exchange was contemplated, i.e., including both the immediate non-resident parent (Foreign SpinCo Sub) and non-resident grandparent (Foreign SpinCo) of TC in a circular exchange of consideration. In the context of this 4-party share exchange, the increase in the paid-up capital in respect of the shares of TC issued to Foreign Spinco Sub occurred "by virtue of the disposition" of the special shares of DC by its foreign parent to TC. Accordingly, s. 212.1(1)(b) (now, s. 212.1(1.1)(b)) applied to grind the PUC of the shares issued by TC to an amount equal to the PUC of the DC special shares.

The butterfly ruling was conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TC shares or DC special shares.

As in, for example, 2014-0530961R3, there was provision for a second stage transfer of cash by DC to TC if (contrary to expectation, as it was anticipated that, after applying the usual consolidated look through rules, including to foreign subsidiaries, there would be only business property) that was required to satisfy the requirements under the butterfly rules for a pro rata distribution of property of DC.

Neal Armstrong. Summary of 2013 Ruling 2012-0459781R3 under s. 55(1) – distribution.

Burlington Resources Finance – Tax Court of Canada states that taking discovery questions “under advisement” should stop

CRA disallowed, in full, under s. 247(2)(a), the deduction by Burlington of guarantee fees paid to its U.S. parent. Justice brought a motion respecting 1200 of their questions posed in the examination for discovery, on the basis that Burlington had either improperly refused to answer, or not fully answered, the questions. Part of the concern of Burlington’s U.S. parent was that it had voluminous boxes of documents stored in various departments which had been largely indexed by each department, but with no central indexing system being available. The overall approach of D’Auray J was reflected in her comment that:

I am not persuaded that the costs, time, and effort involved for Burlington to respond to any relevant questions would be disproportionate, given the amount of money involved which according to the Respondent is close to $100 million, the importance of the case and the complexity of the issues. Proportionality must not defeat the purposes of discovery… .

However, in what might be a significant concession to Burlington, she stated:

Where Burlington is ordered to answer questions, it will not need to search beyond the indexes. In other words, a truly unguided rifling through 12,000 boxes would not be required.

Approximately 1700 questions were taken “under advisement.” D’Auray J stated:

In my view, the practice of using the quasi-objection “under advisement” needs to stop. It is not a response contemplated by section 107 of the Rules.

Neal Armstrong. Summary of Burlington Resources Finance Company v. The Queen, 2017 TCC 144 under Tax Court of Canada Rules (General Procedure), s. 95(2), s. 107(1).

CRA finds that a holding LP for a commercial real estate LP was not engaged in a commercial activity for GST purposes

CRA found that a limited partnership, whose only asset was an interest in a real estate development limited partnership, was engaged only in the making of exempt financial services.

Neal Armstrong. Summary of 19 May 2017 Interpretation 178323 under s. 123(1) – financial service – para. (d).

Income Tax Severed Letters 16 August 2017

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