News of Note
GWR Global Water Resources, a B.C. company, is proposing to merge under Delaware law into a Delaware corporation
Email this ContentThe sole asset of GWR Global Water Resources Corp. (“GWRC”), a TSX-listed small-cap B.C. company, is a 48% equity interest in a Delaware water management company (“GWRI”), with the other 52% held by various private owners. In order to take advantage of a term of bonds previously issued by GWRI, which permits their refinancing if GWRI engages in a public offering, it is proposed that GWRC be merged into GWRI under the Delaware corporate law (but as authorized under a B.C. Plan of Arrangement), with GWRI as the survivor – following which a public offering by GWRI would be completed.
S. 128.2(2) appears to effectively deem such a merger to be the same thing as a continuance to Delaware (triggering asset dispositions under s. 128.1(4)(b) and potential emigration tax under s. 219.1), immediately followed by a s. 87(8.2) absorptive foreign merger of GWRC into GWRI. On the basis that GWRC will not became resident in the U.S. to avoid the emigration tax or Part XIII tax, the applicable rate of emigration tax is reduced under s. 219.3 from 25% to 5%. On the numbers, no significant Canadian tax is anticipated to be triggered. Canadian shareholders are expected to be eligible for rollover treatment given that the merger is believed to qualify as a s. 87(8) foreign merger.
GWRC will be treated for Code purposes as (i) transferring all of its assets and liabilities to GWRI, in exchange for common shares of GWRI, and (ii) distributing those GWRI shares to its shareholders. Although the GWRI shares are FIRPTA assets, this is not anticipated to trigger significant tax. In addition, GWRI is anticipated to have no significant "all earnings and profits amount," so that with the appropriate elections, Code s. 367(b) gain by U.S. shareholders should be avoided.
Neal Armstrong. Summary of Circular for merger of GWR Global Water Resources Corp. under Public Transactions – Other – Continuances/Migrations – Outbound – Outbound mergers.
Income Tax Severed Letters 30 March 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Korfage – Tax Court of Canada notes that CRA has the discretion to use an average annual exchange rate in translating monthly U.S.-dollar amounts received
A Canadian-resident recipient of pension payments from a U.S. pension plan was entitled under Art. XVIII, para. 1 of the Treaty to deduct from his Canadian income the amount of the pension payments which he would have been entitled to exclude from his U.S. taxable income were he a U.S. resident. He was unsuccessful before Lamarre ACJ with an argument that his deduction from his 2010 pension income should use the higher Cdn/U.S. exchange rate applicable when his pension entitlement was crystallized on his retirement in 2000, rather than the 2010 FX rates. She found that the exempt amount arose each month under Code s. 72(b)(1) (based on a straight-line amortization of the U.S.-dollar cost of his pension investment) when the pension payments were received by him, so that those were the stipulated translation times under ITA s. 261(2).
In fact, CRA used the average exchange rate for 2010 for all the 2010 pension amounts, as to which she noted that “the Minister has discretion in the application of an appropriate exchange rate.”
Neal Armstrong. Summary of Korfage v. The Queen, 2016 TCC 69 under s. 261(2).
It might be “market” for tax loss reps in acquisitions of losscos to have a term of 6 or 7 years
Anecdotal evidence and limited publicly available materials suggest that arm’s-length purchasers of losscos are paying from $0.03 to $0.10 per dollar of non-capital losses, so that they are heavily discounting the anticipated post-acquisition value of the losses.
Given that statute-barring does not commence to run until a loss is utilized (so that a tax-balance rep open for the normal reassessment period is effectively open-ended), “it is not unusual for the parties to agree to an explicit survival period in respect of representations relating to tax loss balances; a survey of the limited public disclosure available indicates a range of 6-7 years from closing of the acquisition.”
Neal Armstrong. Summary of Anu Nijhawan, "When is 'Loss Trading' Permissible: A Purposive Analysis of Subsection 111(5)," draft 2015 CTF Annual Conference paper under s. 11(5)(a).
CRA may reduce interest income to the recipient when it denies interest deductions on related person loans
In numerous CRA challenges to interest rates on loans between sister companies, parents and subsidiaries, and in cross border hybrid debt structures, Gosselin and Lynch “have seen significant reductions to interest rates claimed to nominal amounts and in some cases zero.” However, although in theory, the interest income to the creditor could remain fully taxable even following such reduction in the interest deduction, in some files they “have seen CRA apply a policy… to reduce interest income of the recipient entity” by analogy to a two-sided adjustment policy for management fees (see, e.g., 2012-0440071E5).
Neal Armstrong. Summary of Marie-Eve Gosselin and Paul Lynch, "A Review of Interest Deductibility Since Ludco," draft 2015 CTF Annual Conference paper under s. 20(1)(c).
Livent – Ontario Court of Appeal finds that a company can hold its auditors liable for failure to detect the company’s own fraud effected through its senior management
Deloitte was unsuccessful in arguing that it was not liable to the receiver for a public company (Livent), for failure to detect the fraudulent misstatement of Livent’s financial statements, because it was the most senior management of Livent who were proactively engaged in the fraud, so that effectively Livent was suing Deloitte for Livent’s own fraud. Blair JA quoted with approval a statement by Lord Mance that “[i]t would lame the very concept of an audit” if the auditor could “defeat a claim for breach of duty in failing to detect managerial fraud at the company’s highest level by attributing to the company the very fraud which the auditor should have detected.”
Hopefully this case is irrelevant to tax practice. It might arguably be relevant if, for example, you provided a withholding tax opinion as a condition to a financing based on factual representations of management which you should have realized were false, and the receiver subsequently sues you for the company’s (grossed-up) Part XIII tax liability.
Neal Armstrong. Summaries of Livent Inc. v. Deloitte & Touche (2016), 128 OR (3d) 225 (Ont CA) under General Concepts – Negligence, and General Concepts – Illegality.
Kitco – Quebec Superior Court finds that CRA and ARQ cannot collect pre-CCAA assessments by set-off against post-CCAA refund claims
Paquette J has found that CRA and ARQ could not use their statutory set-off rights to set off input tax credit and input tax refund claims generated by an insolvent company (“Kitco”) after it went into protection under the CCAA against assessments made by them (and disputed by Kitco) in which they denied ITCs and ITRs of $313 million that had been claimed and paid by Kitco before the CCAA proceedings. She found that to permit such set-off would give the Agencies an advantage over the unsecured creditors (by taking all of the post-CCAA credits for themselves) and therefore violate the principle that all unsecured creditors should be treated equally.
She also found that the statutory presumptions (e.g., ETA, s. 299(3)) that assessments are valid and binding did not apply in CCAA proceedings.
Neal Armstrong. Summaries of Métaux Kitco Inc. v. ARQ and AG, 2016 QCCS 444 under CCAA s. 21 and ETA s. 299(3).
CRA confirms that the basic application of s. 55(2) to s. 84(3) deemed dividends is not altered by the draft amendments
CRA has confirmed that the July 31, 2015 proposed amendments to the s. 55(2) rules will not change some basic propositions:
- A s. 84(3) deemed dividend not exceeding the safe income on hand will be exempted from capital gains treatment.
- Conversely, the amount of a s. 84(3) deemed dividend exceeding the safe income on hand “that is taxable to the party designated by the corporation pursuant to subparagraph 55(5)(f)(i) is deemed to be a separate taxable dividend,” so that s. 55(2) will apply to that separate dividend subject to the Part IV tax and s. 55(3)(a) exceptions. (CRA did not discuss its position under the current legislation that s. 55(5)(f) designations may not be necessary – see 2014-0522991C6).
CRA also noted that under the draft legislation, the application of s. 55(2) to a redemption/repurchase of a share, will result in an addition under draft s. 55(2)(b to the share’s proceeds of disposition – whereas if s. 55(2)(b) does not apply, there will be a deemed capital gain under draft s. 55(2)(c) – without commenting on the wording of draft s. 55(2)(b) now referring to share redemptions/purchases rather than to any share dispositions.
Neal Armstrong. Summaries of 9 March 2016 T.I. 2016-0630281E5 F under s. 55(2.1)(c), s. 55(5)(f) and s. 55(2)(b).
CRA appears to consider that generally a Canadian enterprise may not pass along the benefit of government assistance to a non-resident affiliate in its transfer pricing
CRA considers that:
When a cost-based transfer pricing methodology is used to determine the transfer price of goods, services, or intangibles sold by a Canadian taxpayer to a non-arm's length non-resident person and the Canadian taxpayer receives government assistance, the cost base should not be reduced by the amount of the government assistance received, unless there is reliable evidence that arm's length parties would have done so given the specific facts and circumstances.
CRA provides an example of a Canadian enterprise providing R&D services to an affiliate at a price equal to cost (as reduced by SR&ED tax credits) plus 10%, so that CRA in the absence of such “reliable evidence” would increase the transfer price to 110% of the gross cost.
It may be difficult or impossible for the Canadian enterprise to find evidence of arm’s length parties passing on the cost reduction from government assistance.
Neal Armstrong. Summary of TPM-17 “The Impact of Government Assistance on Transfer Pricing” under s. 247(2).
Conventional equity forwards likely are not DFAs, and equity derivatives may be held as investments
The definition of “synthetic equity arrangement” (which is used under the July 31, 2015 draft legislation to extend the scope of the dividend rental arrangement rules) excludes agreements that are traded on a “recognized derivative exchange,” subject to anti-avoidance provisions. Although the explanatory notes contemplate that foreign exchanges will be recognized by provincial securities commissions, the commissions instead usually exempt foreign exchanges from the requirement to be recognized or registered.
It is unlikely that the effect of prevailing interest rates on the negotiated (fixed) forward price under an equity forward causes the forward to be a derivative forward agreement, even where the taxpayer is the seller rather than purchaser.
CRA appears to assume that a derivative that is not entered into for hedging purposes is speculative and, therefore, held on income account. This is questionable where a long position under an equity derivative, e.g., a total return swap, has been acquired as an alternative to investing in the underlying equities.
Neal Armstrong. Summaries of Raj Juneja, “Taxation of equity derivatives,” draft 2015 CTF Annual Conference paper under s. 248(1) – synthetic equity arrangement, s. 248(1) – derivative forward agreement, s. 9 – capital gain v. profit – futures/forwards, s. 212(1)(b), s. 212(1)(d).