News of Note
Abdalla – Federal Court of Appeal confirms the test to be applied in determining a waiver’s validity
Email this ContentRossiter CJ had found that taxpayers had given valid waivers of their right to appeal: even though the waiver letter drafted by CRA was “poorly worded … if read in its entirety … there is a sufficient and adequate explanation in the letter [such] that a person would have full knowledge of the rights being waived.” In affirming this finding, Gleason JA indicated her agreement that the following judicial test had been satisfied:
[T]wo elements [are] required to show a valid waiver: (1) full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them communicated to the other party.
Neal Armstrong. Summary of Abdalla v. Canada, 2019 FCA 5 under s. 169(2.2).
Maxar Canada shareholders exchanged all their shares for a new U.S. holding company
In connection with regulatory approval of its acquisition of DigitalGlobe, Maxar Technologies Ltd. (“Maxar Canada”) committed that the Maxar group would restructure so that, by the end of 2019, the ultimate parent would be a U.S.-incorporated corporation. This was accomplished on January 1, 2019 pursuant to a B.C. Plan of Arrangement. There was a three-party exchange under which
- the Maxar Canada shareholders transferred their shares to a newly-formed B.C. unlimited liability company subsidiary of Maxar Canada (“AcquisitionCo”);
- a newly-formed Delaware subsidiary of Maxar Canada (“Maxar U.S.”) issued shares to the former Maxar Canada shareholders in consideration for the transfer to it of Maxar Canada in 1 ; and,
- AcquisitionCo issued common shares to Maxar U.S. in consideration for the issuance by Maxar U.S. in 2.
The incorporator’s share of Maxar U.S. held by Maxar Canada then was cancelled; and AcquisitionCo and Maxar Canada amalgamated so that Amalco was now a wholly-owned subsidiary of Maxar U.S.
The exchange by the Maxar Canada shareholders occurred on a taxable basis for ITA purposes. Although for Code purposes, the reorganization was expected to qualify as an “F” reorg, Code s. 367 resulted in most taxable U.S. residents, who owned Maxar Canada shares with a fair market value of U.S.$50,000 or more, recognizing a gain (if any), but not a loss, for Code purposes.
Neal Armstrong. Summary of Maxar Technologies Circular under Other – Continuances/Migrations – New Non-Resident Holdco.
CRA declines to provide comfort that travel allowances of employees at accounting firms for travel on their audit engagements are non-taxable
Are employees of auditing firms taxable on the travel allowances they receive for travelling to and from their home and the audited premises in the context of audit engagements lasting about two weeks? CRA noted that in T4130 it had stated that its concept of a "regular place of employment” included, for example, “a client's premises when an employee reports there daily for a six month project” and “a client's premises if the employee has to attend biweekly meetings there,” and then indicated that it could only make a few general comments, including:
If the place of business of a client of the firm constitutes a "regular place of employment" for the auditor, the travel between the auditor’s residence and the place of business of that client is considered personal travel and is therefore not considered travel "in the performance of the duties of the employee’s office or employment". Consequently, the allowance received from the firm by the auditor in the year for this travel must be included in the auditor’s income by virtue of paragraph 6(1)(b).
This was not as bad as stating that the allowances were clearly taxable. It took the Directorate almost four years to respond to this question.
Neal Armstrong. Summary of 19 July 2018 External T.I. 2014-0551941E5 F under s. 6(1)(b).
CRA finds that a US LLC did not have a Canadian PE where a former employee serviced its U.S. clients from his Canadian home office under pass-through payroll arrangement
CRA ruled that the emigration to Canada of a portfolio manager (“Can Worker”), who had been employed in the U.S. office of an investments manager (an LLC), with Can Worker thereafter doing the same work from his home office (in his Canadian home), did not cause the LLC to acquire a permanent establishment in Canada under Art. V of the Canada-U.S. Treaty.
This conclusion likely was assisted by some structuring, namely, Can Worker ceased to be an employee (although he continued to be a shareholder of the LLC). Instead, he was now employed and remunerated by a special-purpose Canadian subsidiary of an arm’s length non-resident services firm which, in turn, charged service fees to the LLC.
Can Worker had no authority to contract on behalf of the LLC, his home office was not identified with the LLC’s business of manager, and his office’s expenses were not borne by the LLC (although it reimbursed Can Worker for costs of travel to and from the U.S. to meet clients or prospects, and his computer was owned by the LLC and connected to its network.)
The services PE rule in Art. V(9) was irrelevant since it was U.S. clients who were being serviced, and well under 50% of the revenue of the LLC was derived from the services performed by Can Worker.
Neal Armstrong. Summary of 2018 Ruling 2017-0713071R3 under Treaties – Income Tax Conventions – Art. 5.
CRA goes along with new OECD transfer-pricing policy of overriding the legal characterization of transactions
The OECD 2017 Transfer Pricing Guidelines reoriented transfer pricing towards the concept of value creation, namely, of ensuring that profits are taxed where economic activities take place and value is created. This represents a significant departure from the Canadian jurisprudence, which generally respects the legal substance of arrangements rather than recharacterizing them in accordance with their underlying economic substance.
The 2017 Transfer Pricing Guidelines also essentially proposed that, in order to compare an (actual) transaction between associated enterprises with a comparable transaction entered into between independent parties, the actual transaction must be first "accurately delineated" in light of "economically significant characteristics," e.g., the conduct of the associated parties, the functions they perform, the assets they actually use and the risks they actually assume.
If an analysis of the above enumerated economically significant characteristics results in a delineation of a transaction that differs from that entered into under the contract between the associated enterprises, the accurate delineation principle would then ignore the contractual transaction in the comparability analysis, instead focusing on the "accurately delineated" transaction.
As an example of this recharacteriazation approach (even where the criteria in s. 247(2)(b) are not both satisfied), the OECD’s recent Discussion Draft on Financial Transactions provides an example of a purported loan being “accurately delineated” as equity, chiefly because of a low likelihood of repayment within the specified term.
In this context, it is problematic that the 2018 CTF Rouundtable, Q.4 indicated that CRA will apply the 2017 Transfer Pricing Guidelines to pre-2017 taxation years, as well as to the interpretation of treaties entered into post-2017. CRA does not consider such an application to be retroactive, due to CRA’s characterization of these Guidelines as merely an elaboration on the prior OECD guidance.
Neal Armstrong. Summary of Matias Milet and Jennifer Horton, “The Canada Revenue Agency’s Interpretation of the 2017 OECD Transfer Pricing Guidelines,” International Tax (Wolters Kluwer CCH), No. 103, December 2018, p.10 under s. 247(2).
Income Tax Severed Letters 9 January 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Thomson Reuters engaged in a U.S.$6.5B cash issuer bid under a modified Dutch auction
Prior to the s. 86 distribution of cash by Thomson Reuters described in a previous post, it made an issuer bid to purchase up to U.S.$9 billion of its shares for cash under a modified Dutch auction procedure. In fact, U.S.$6.5 billion in shares was tendered. Leaving aside s. 55(2), over ¾ of the purchase price was deemed to be a dividend.
The principal “modification” related to a desire of Woodridge, who held 62% of the Thomson Reuters shares, to not have its percentage interest change. Accordingly, there was added the concept of a “Proportionate Tender” under which a shareholder tendering its shares to Thomson Reuters under this alternative was deemed to have agreed to sell to Thomson Reuters, at the purchase price determined in accordance with the Dutch auction procedure, that number of shares that would result in its percentage shareholding remaining the same.
Shareholders also were offered a “Qualifying Holdco Alternative.” This entailed such a shareholder together with an affiliated “Preferred Holdco” transferring their Thomson Reuters shares to a Newco (potentially on a s. 85 rollover basis) in exchange for common and preferred shares of Newco. Newco (along with other Newcos) then amalgamating with a sub of Thomson Reuters under a triangular amalgamation in which the electing shareholder and Preferred Holdco received shares of Thomson Reuters. Such shares could then be tendered under the offer. Woodridge indicated that it would participate in the Qualifying Holdco Alternative, and it is unclear who else it might have been of interest to.
Neal Armstrong. Summary of Thomson Reuters Circular under Other – Issuer Bids – Share Offer.
CRA rules that a Luxembourg FCP was a co-ownership rather than a trust or partnership
Foreign pension funds invested in particular securities’ portfolios including, in some cases, Canadian securities through acquiring “units” in particular sub-funds of a Luxembourg FCP (“fonds commun de placement,” which might literally be translated as an “investment mutual fund”). Their units were stated to give them a proportionate ownership interest in the sub-fund. The portfolios were managed by a manager and held by separate custodians.
CRA ruled that the FCP including the constituent sub-funds would be treated as fiscally transparent for purposes of the Act so that, for example, dividends or interest paid by a particular Canadian investment in a sub-fund would be considered an amount paid directly to the unitholder “in proportion to its co-ownership interest in the assets and Gross Income of the particular Sub-Fund.” This ruling letter essentially constitutes the reissuance of a ruling letter given a decade previously.
Neal Armstrong. Summary of 2017 Ruling 2015-0605161R3 under s. 104(1).
7 further translations of CRA interpretations are available
We have released another 7 translations of CRA interpretations released in December 2012 including 5 from the 2012 APFF Roundtables.
These are additions to our set of 747 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for January.
Thomson Reuters distributed US$2.3 billion in cash pursuant to a s. 86 reorg with opt-out rights
On November 27, 2018, Thomson Reuters distributed US$2.3 billion to its shareholders (being a portion of the US$17 billion realized earlier in the year on an asset sale), using a s. 86 distribution. In order to avoid potentially adverse tax consequences for some shareholders in foreign jurisdictions, Thomson Reuters gave non-exempt shareholders in non-Canadian jurisdictions the right to opt out of the cash distribution so that, rather than receiving such cash, their percentage equity interest in the Corporation would increase by an appropriate amount.
To accomplish this result, the “Participating Shareholders” (i.e., those who did not elect to be “Opting Out Shareholders”) had each of their old common shares exchanged under a s. 86 reorg for US$4.45 of cash and 0.9070 of a new common share, whose attributes were the same as for an old common share, except that it was convertible on a one-for-one basis for an old common share. All their new common shares were then converted into old common shares. The Opting Out Shareholders continued to hold the same number of old common shares as before. Given the paid-up capital per old common share of C$13.36 per share, no deemed dividend arose.
This “Return of Capital Transaction” was effected pursuant to on Ontario Plan of Arrangement, whose terms effectively indicate that the Corporation is potentially willing to entertain letting Participating Shareholders elect under s. 85(1) or (2) respecting the above exchange.
Neal Armstrong. Summary of Thomson Reuters Circular and Press Release under Spin-offs & Distributions – S. 86 cash distributions.