News of Note
CRA indicates that normal course dividends and loss-shifting transactions generally do not engage the new s. 55(2) rules
Email this ContentPoints made by CRA respecting the new s. 55(2) rules include:
- "Normal course" dividends (albeit with a narrow description of the only clear safe harbour) should not be subject to the new rules.
- CRA is willing to issue opinions (and presumably rulings, once the new rules are enacted) on the non-application of s. 55(2.1), although as a purely technical matter they will be somewhat meaningless, as the required representations will beg the (purpose) question.
- Conventional loss shifting transactions (which CRA has already been requiring not to create additional basis) will not be subject to the new rules.
- Where a non-participating discretionary shares has no accrued gain, then a dividend paid thereon which violates the purpose test cannot benefit from safe income. However, where this occurs, CRA is prepared to accept that the safe income on the participating shares of the same corporation will not be affected.
- CRA considers it to be offensive to redeem a share for a note in a s. 55(3)(a) reorganization, with the note being used to generates basis in excess of redeemed shares’ ACB.
- Also offensive is "ACB streaming prior to a reorganization under 55(3)(a) or (b), where the redemption would be of low-ACB shares, while the high ACB shares would be preserved."
- CRA appears to consider creditor-proofing transactions to per se entail a purpose that engages the new rules.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q.6 under 2015 CTF Roundtable.
CRA translates USD debt at the historical rate for thin cap purposes
CRA considers, based on s. 261(2), that the amount of U.S.-dollar denominated debt is to be measured for thin cap purposes in Canadian dollars based on the FX rate at the time the loan was made.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 10 under 2015 CTF Rountable.
Income Tax Severed Letters 25 November 2015
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA currently is inclining to classify Delaware and Florida LLPs and LLLPs as corporations
CRA is "heavily leaning" towards characterizing Florida limited liability partnerships (LLPs) and Florida limited liability limited partnerships (LLLPs) as corporations, and is a few weeks away from reaching a definitive conclusion on this point. Its preliminary view is that the equivalents under Delaware law also are corporations.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 7(b) under 2015 CTF Roundtable.
CRA maintains its policy on LLCs as corporations
CRA essentially indicated that Anson has not changed its view that an LLC is a corporation for purposes of the Act. (CRA was obliged to point out that it has not examined all the LLC statues or even changes to ones that it previously has examined, but did not communicate that this was a big deal).
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 7(a) under 2015 CTF Roundtable.
CRA finds that a Canadian parent realizes income if an upstream loan owing by it is extinguished on winding up a CFA
A loan from a foreign affiliate to its Canadian parent generally must be repaid within two years lest the amount of the loan be included in the parent’s income under s. 90(6). CRA was asked whether this payment requirement would be considered to be satisfied if the foreign affiliate is wound up (perhaps on the basis that there is an implicit set-off between the amount owing by the parent and the winding-up distribution payable by the foreign affiliate - see e.g., 2013 Ruling 2013-0498551R3).
CRA indicated that it was not prepared to attempt to provide an administrative solution to this problem (so that such income inclusion would occur under current law) and had drawn this issue to the attention of Finance.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 8 under 2015 CTF Roundtable.
CRA is revoking rulings on conversions of three year bonus unit plans (RSUs) to DSUs
CRA at one point had been providing rulings accommodating the conversion of three-year bonus unit plans (under para. (k) of the salary deferral arrangement rules) into deferred share unit plans (intended to be governed by Reg. 6801(d)) (See e.g. 2005-0144541R3). CRA has now concluded that the Act does not accommodate this flexibility and has revoked or will revoke such rulings. Units that were already in the bonus plan prior to the revocation can still be converted.
Plans established under 409A of the Code permit a more flexible range of events giving rise to a distribution entitlement than is permitted under the DSU rules in Reg. 6801(d). A Canadian employee who is a member of such a plan will be required to comply with the more restrictive Canadian rules.
Edited transcripts of the answers given today at the annual CTF Roundtable are being uploaded over the next several days.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 2 under 2015 CTF Roundtable.
Killam is converting to a REIT with a limited rollover option
Killam is proposing to effectively convert to a REIT (although, very unusually no statement is made that management actually expects it to qualify as a REIT). Most of its shareholders will exchange their shares for units of the REIT on a taxable basis. However, up to 20% of the shares may instead be exchanged on a s. 97(2) rollover basis for exchangeable units of a subsidiary LP into which Killam will be dropped, with the REIT backstopping the exchange obligations of the LP under an Exchange Agreement.
In order that the subsidiary LP will be an "excluded subsidiary" (i.e., within a safe harbour from the SIFT rules), those electing rollover treatment generally must be taxable Canadian corporations - so that individuals wishing to elect would need to transfer their shares first to a holding company. Killam will then be transferred to a Newco for consideration including an interest-bearing note, followed by their amalgamation, in order to shelter the rental income of the properties now held by Killam through a lower-tier LP.
Convertible debentures of Killam (bearing interest of around 5.5%) will simply be assumed by the REIT in consideration for the issuance of a note to it by Killam.
Neal Armstrong. Summary of Killam Properties Circular under Offerings - REIT and LP Offerings - Domestic REITs.
Tribute Pharmaceutical proposes an inversion transaction with Pozen resulting in both corporations becoming indirect wholly-owned subsidiaries of a new public Irish holding company
A Circular of Tribute Pharmaceuticals (a Canadian public company) dated November 6, 2015 describes a proposed inversion transaction with Pozen, a Delaware public company, which would result in both companies being held through an Irish holding company (Parent), with Pozen and Tribute shareholders holding approximately 63% and 37% of the shares of Parent, respectively, before giving effect to a subsequent financing. To achieve this structure, Pozen would cause Parent to be incorporated, "Ltd2" (an Irish private limited company) would be incorporated as a direct, wholly-owned subsidiary of Parent, and each of US Merger Sub and Can Merger Sub would be incorporated as sister corporations and subsequently transferred to become direct, wholly-owned subsidiaries of Ltd2. Can Merger Sub would acquire all of the outstanding common shares of Tribute under an OBCA arrangement in exchange for delivering Parent shares, and US Merger Sub would be merged with and into Pozen under a Delaware merger, with Pozen as the survivor.
The transaction (targeted to be completed by year-end) is conditional on an opinion from Pozen's special tax counsel to the effect that Code s. 7874, existing regulations promulgated thereunder, and official interpretation thereof should not apply so as to cause Parent to be treated as a U.S. corporation for Code purposes.
An Irish holding company also was used in the somewhat more intricate Endo/Paladin inversion transaction.
Neal Armstrong. Summary of Tribute Pharmaceuticals Circular under Other – Inversions.
Elim Housing Society – Tax Court of Canada finds that a nursing home for those with dementia qualified for the enhanced public service body HST rebate
Woods J found that a B.C. long-term care facility, whose residents mostly had dementia, severely impaired mobility, complex medical issues and a life expectancy of between three months and three years, was making "facility supplies," so that it was eligible for the enhanced 83% public service body HST rebate. This likely overrules 3 July 2012 Ruling 109082 (re a nursing home).
Although there were a number of significant and novel interpretive issues to resolve, the "gist of the dispute… [was] whether the services provided by care aides…, such as toileting and bathing, [were] therapeutic health care services." Woods J found that it was sufficient that these care aide services were provided at the direction of the on-site nurses "to address particular medical concerns."
Neal Armstrong. Summary of Elim Housing Society v. The Queen, 2015 TCC 282 under ETA s. 259(1) – facility operator.