News of Note

The Sprott Physical Uranium Trust was formed in April 2021 to acquire all the common shares of Uranium Participation Corporation (“UPC”), an OBCA corporation, under a Plan of Arrangement. UPC held over US$600 million in uranium through a Bermuda subsidiary, which will be wound-up under s. 88(3). The Trust has now issued a Short Form Base Shelf Prospectus for the further issuance of units by it, which will continue to be listed on the TSX.

As it is a closed-end trust (presumably with an eye to not triggering corporate tax), the Trust does not qualify as a s. 108(2)(a) unit trust or as a mutual fund trust. However, in order to avoid a deemed disposition on its 21^st anniversary, it is directed in its trust agreement to become a unit trust before then.

It does not expect to be subject to SIFT tax, on the basis that the Uranium held by it and UPC will not be non-portfolio property. It and UPC do not expect to dispose of uranium except to fund administrative expenses, so that the uranium is expected to be capital property.

Neal Armstrong. Summary of 10 August 2021 Short Form Base Shelf Prospectus of Sprott Physical Uranium Trust under Commodity Funds – Metals Funds.

CRA ruled on the s. 55(3)(a) spin-off by DC (held by three siblings through holding companies and, in turn, holding three Opcos as well as three Landcos, one of them 50% owned by a third party) of the three Landcos to newly-formed TC held by the same holding companies. This ruling letter departed somewhat from the expected.

First, although no s. 86 ruling was given, the letter described a preliminary s. 86 reorganization to create the DC special shares that could then be transferred on a s. 85(1) rollover basis by the Holdcos to TC. The s. 86 reorganization entailed an exchange of the old common shares (and old special shares) for “new” common shares and the new special shares, with the new common shares apparently having the same attributes as the old common shares. For s. 86 to apply, all the old shares must be disposed of. CRA has indicated (e.g., in 2013-0495821C6 and 2004-0092561E5) that there has been no disposition if the “new” common shares have the same attributes as the old. Accordingly, it is common for there to be some change in the share attributes, e.g., amending the old shares immediately before the exchange so that they have two votes per share (2014-0558831R3) or according the new shares an explicit right to receive quarterly financial statements (2013-0491651R3). Is this sort of thing now unnecessary?

Second, there is a representation, that:

TC does not intend to sell or otherwise transfer any of the assets it will receive in the course of the Proposed Transactions.

This does not appear to be a requirement for a s. 55(3)(a) spin-off. Was this offered up by the taxpayer, or did Rulings insist on it?

Neal Armstrong. Summary of 2020 Ruling 2020-0854401R3 under s. 55(3)(a).

X and Y (unrelated individuals), who each wholly-owned operating corporations ("ACo" and "BCo"), also equally owned XYZCo, which built and sold two condominiums to ACo and BCo at a mutually agreed price that they knew to be below fair market value.

After the usual caveats about questions of fact, CRA indicated that if indeed this was the mutual back-scratching arrangement that it appeared to be, the sales likely were non-arm’s length transactions to which s. 69(1)(b) would apply. Furthermore, assuming that this should be characterized as a situation where X and Y were directing the conferral of a benefit on their respective corporations that would have been taxable to them under s. 15(1) if received directly, then s. 56(2) could apply to include the known FMV deficiencies in their respective incomes.

Neal Armstrong. Summaries of 1 June 2021 External T.I. 2020-0865201E5 F under s. 251(1)(c) and s. 56(2).

The taxpayer used funds that he had generated from a successful career in the oil and gas industry to make interest bearing loans to third parties. Loans of $10 million at 16% interest that he had made to indirectly finance a pay-day loan company, and of $3.5 million that he had made at 22.5% interest to a junior venture capital company, went bad.

Wong J found that the taxpayer did not go “about his loan activities in an orderly, businesslike way, as a business person would normally be expected to do” and thus was not “in the business of lending money during the years under appeal because the positive indicia of a business were either absent or minimally present.” In this regard, she noted that:

• He lent surplus funds (presumably, as contrasted to using borrowed funds).
• The loans were unsecured.
• The number of borrowers and of loans was limited.
• The loan terms were not complex and had not been negotiated by him.
• He used word of mouth and social contacts to generate leads.
• His deficient record-keeping was more consistent with investing than running a business.

His losses were on capital account.

Neal Armstrong. Summary of Kallis v. The Queen 2021 TCC 58 under s. 18(1)(b) – capital loss v. loss - debt.