News of Note
The UnitedHealth Group acquisition of Catamaran will partially side-step Canada by investing up to U.S.$5B of the purchase price in a Catamaran LLC subsidiary, with that cash being indirectly distributed to the Catamaran shareholders as share redemption proceeds
Email this ContentIt is proposed that Catamaran, a Canadian public company with a U.S.-focused pharmacy claims management business, will be acquired under a Yukon Plan of Arrangement by a B.C. ULC subsidiary of UnitedHealth Group, a public Minnesota corporation. Each Catamaran shareholder will receive $61.50 per common share in cash. However, in order to accomplish a partial "de-sandwiching" of the resulting structure, the cash proceeds will be bifurcated. Approximately $18 to $24 per share (or $3.7B to $5B in total) will be received as a result of a (presumably non-Canadian) subsidiary of UnitedHealth Group lending to an indirect LLC subsidiary of Catamaran, with those funds being indirectly distributed to Catamaran which, in turn, will distribute those funds to its shareholders as redemption proceeds for preferred shares which were issued to them under a s. 86 reorg.
The balance of the cash will be paid by the (B.C. ULC) purchaser for the "Class X" common shares of Catamaran (also issued under the s. 86 reorg.) Catamaran apparently is a "10(f) corp" for purposes of the foreign affiliate dumping rules.
For U.S. purposes, this bifurcated transaction likely will be viewed as an integrated transaction, i.e.., the preferred share redemption proceeds will be treated as part of the sales proceeds, rather than as a dividend (to the extent of current or accumulated E&P) – and the Plan of Arrangement requires the parties to follow this treatment for U.S. purposes.
Neal Armstrong. Summary of Catamaran Proxy Statement under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
Income Tax Severed Letters 27 May 2015
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Joint Committee releases its submissions on synthetic equity arrangements and Reg. 102 withholding
Two Joint Committee submissions on 2015 Budget proposals have been released.
- The synthetic equity arrangement rules may capture dividends (e.g., safe income dividends) paid to a vendor during the period between the date of agreeing to sell shares and the closing
- Issues respecting the proposed relief from source deductions for non-resident employees working for non-resident employers relate inter alia to gaps between the Reg. 400 definition of a permanent establishment (used in the proposals) and the different Treaty definitions (e.g., the services PE in the Canada-US Treaty), how to apply a rule that presence in Canada must be less than 90 days in any 12 month period, vagueness respecting employer "certification" and application of the rule to LLCs.
Neal Armstrong. 26 May 2015 submissions under Joint Committee Submissions.
CRA finds that the “extension” of an agreement one day after its expiry could result in a new agreement
The phase-out rules for the overseas employment tax credit provide limited relief for a contract "committed to in writing before March 29, 2012." CRA was asked if this relief would apply if an agreement to extend a grandfathered agreement was entered into on January 1, 2013, being one day after the original term of that agreement expired. CRA stated:
Where the extension of a contract is agreed to on a date that occurs after the original contract has already expired…we would generally be of the view that the parties have entered into a new contract rather than merely extending the old contract unless the taxpayer can demonstrate otherwise under the governing private law.
It is not clear what to make of this response given that CRA stooped to engage with the unsophisticated manner in which the question was formulated. However, whenever an agreement is amended, it would be a good idea for the amending agreement to be dated before the expiry date for the original agreement.
Summary of 30 January 2015 T.I. 2014-0521751E5 under General Concepts – Transitional Provisions.
Vendor partnerships may not be able to access a safe harbour from application of the restrictive covenant rules – but this may not matter as it very well may be reasonable to allocate nil to a restrictive covenant under general principles
A safe harbour from the potential application of s.68 to a non-compete may require that consideration be received by either the "taxpayer" (defined to include a partnership) or an "eligible corporation" of the taxpayer. This requirement will not be satisfied if the taxpayer is a trust and beneficiaries, or the trustees in their personal capacities, are expected to grant the covenant. If partners of a partnership grant the covenant, issues arise under a potential requirement to allocate to each partner that portion of "goodwill amount" proceeds that is consideration for the non-compete covenant granted by that partner. For example, if a $1 million goodwill amount received by a partnership with three equal partners is allocated equally to them, will this requirement be satisfied if 90% of the goodwill amount is actually attributable to only one partner’s non-compete?
A further safe harbour requirement, that no proceeds be received for the non-compete covenant, should not be violated by virtue of a sale agreement reciting that the restrictive covenant is integral to the agreement and was granted to maintain the value of the sold assets. Not allocating any portion of the sales proceeds to the covenant should not detract from its enforceability.
An exclusion from the safe harbour where s. 84(3) "applies" to the transaction can be engaged in a hybrid transaction (including one not giving rise to a deemed dividend) or a safe income strip.
If the safe harbour is not available, "there would appear to be significant support for the position that two reasonable business persons would agree to allocate nil or nominal consideration to a restrictive covenant." The reasonableness of a nil allocation may be buttressed if the parties could (had they made an election) have achieved the same effective result under s. 56.4(3).
Neal Armstrong. Summaries of Michael Coburn, "Practical Strategies for Dealing with the Restrictive Covenant Provisions," draft version of paper for CTF 2014 Conference Report under s. 56.4(7)(b), s. 56.4(7)(d), s. 56.4(7)(e), s. 68(c), s. 56.4(3)(b), s. 56.4(2) and s. 56.4(1) – restrictive covenant.
CRA clarifies the application of the zero-rating and place-of-supply rules to charter flights
Points made by CRA in its new Info Sheet on charter flights include:
- A "stopover," a concept which bears on when flights are zero-rated, e.g., for "continuous journeys" whose origin or termination is outside Canada or the continental U.S., as well as on the place-of-supply rules for provincial HST purposes, is considered by CRA not to include a stop of less than 24 hours between two legs of a journey.
- The concept of a "continuous journey," whose definition requires that all related "tickets or vouchers’’ be issued by one supplier or agent, also is expanded by a CRA view that "a document that contains all the information commonly found on a ticket" should be treated as a ticket.
- CRA considers that most charter flights are supplies of a "passenger transportation service," although a mere leasing or licensing of an aircraft does not so qualify.
- The usual single-supply doctrine applies so that, for example, a charge for ferrying a plane from another city to the embarkation point for the charter flight and various airport charges which the carrier has no choice but to incur will be part of the consideration for the passenger transportation service provided by the carrier.
Summaries of GST/HST Info Sheet GI-170 "Charter Flights Supplied to Third-Party Charterers" under Sched. VI, Pt. VII, s. 1(1) – stopover, s. 1(1) – continuous journey, s. 3 and s. 4.
CRA reiterates that the lease/purchase distinction is based on legal rather than economic substance
Before noting that a lease of a transport truck was not eligible for a s. 16.1 election, CRA stated:
[T]he determination of whether a contract is a lease or a sale for income tax purposes is based on the legal relationships created by the terms of the particular agreement, rather than the underlying economic reality. In the absence of a sham, a lease is a lease and a sale is a sale.
Neal Armstrong. Summary of 28 April 2015 T.I. 2015-0566011E5 under s. 16.1(1).
When a DSU was terminated contrary to the DSU rules, CRA applied the SDA rules retroactively
If a DSU plan is amended so that it no longer qualifies then, depending on the circumstances, CRA may consider that this evidences that the plan was never intended to comply, so that it is subject to the salary deferral arrangement rules on a retroactive rather than prospective basis. For example, in an actual situation "where a DSU plan was terminated and all outstanding awards were redeemed in cash…,[a]s the early redemption did not involve extraordinary circumstances…we took the position that the SDA rules applied retroactively with respect to any outstanding awards."
In light of the wording of s. 6(11) (see also Dominion of Canada and Sears Canada), retroactive application would mean that "if an amount was includable in income in a year that is now statute-barred, … the amount [would] be…brought forward and included in income in the earliest non-statute-barred year."
Neal Armstrong. Summaries of 29 April 2015 T.I. 2015-0565181E5 under Reg. 6801(d) and s. 6(11).
CRA confirms application of s. 55(3.01)(g) safe harbour through use of a holdco
CRA has confirmed that s. 55(3.01)(g) generally will permit two unrelated individuals to spin-off real estate from a jointly owned Opco to a newly-incorporated jointly-owned Realtyco provided that they first interpose a holding company between themselves and their two companies (Opco and Realtyco).
Neal Armstrong. Summary of 14 April 2015 T.I. 2015-0570021E5 F under s. 55(3.01)(g).
CRA finds that where shares acquired on a stock option exercise are immediately sold on an earn-out basis, the s. 7 benefit should include the current earn-out value
If an employee exercises options to acquire shares of a private company with a view to immediately becoming party to an agreement for the sale of the shares on an earnout basis, CRA considers that the s. 7 employment benefit recognized on such exercise should take the value at that time of the earnout clause into account.
CRA recognized that the right question is: what was the fair market value of the acquired shares at the time of exercise? Trying to answer by valuing the proceeds for which they in fact were sold might give the wrong number given the difficulties of valuing an earn-out clause.
Neal Armstrong. Summary of 4 May 2015 T.I. 2013-0502761E5 F under s. 7(1)(a).