News of Note
The OECD Report on "Hybrid Mismatch Arrangements" recommends that Canada deny Canadian tax benefits from common cross-border financing arrangements with the U.S.
Email this ContentThe implementation of the OECD Report on "Hybrid Mismatch Arrangements" by Canada (or the U.S.) would adversely affect common cross-border financing structures. For example:
- In the likely event that Congress does not adopt the Report's recommendation for the denial of U.S. interest deductions for a repo structure (in which U.S. Finco sells preferred shares, issued by U.S. Opco, to Canadian Parent - viewed as a borrowing by U.S. Opco for U.S. purposes), Canada would be expected to deny the s. 113 deduction on the preferred dividends.
- Where a ULC is financed by a loan from a U.S. affiliate of its U.S. shareholder (so that the interest is recognized for U.S. purposes but eliminated on consolidation), Canada may be expected to deny all interest deductions.
- The Report effectively recommends that Canada deny the interest deduction generated in a tower structure.
Neal Armstrong. Summary of Abraham Leitner "BEPS Targets Commonly Used Canada-U.S. Hybrid Structures," Tax Notes International, 9 February 2015, p. 531 under Treaties – Art. 11.
Tekmira to acquire a Delaware private company of equal value in a Delaware merger which avoids the inversion rules
OnCore, a private Delaware biopharmaceutical company with a controlling Bermuda shareholder, will be merged into a Delaware subsidiary of Tekmira Pharmaceuticals, a NASDAQ and TSX-listed BC biopharmaceutical company, with OnCore shareholders receiving Tekmira common shares on the merger. Immediately after the merger the OnCore shareholders may hold 51.7% of the Tekmira common shares – or 50% on a fully diluted basis.
As OnCore shareholders are expected to receive less than 60% of the votes and value of Tekmira common shares on the merger, the Code s. 7874 inversion rules are not expected to apply. However, the Code s. 382 ownership change rules may restrict the use of OnCore’s NOLs. (Although the s. 382 test is a 50% share ownership test which typically does not take options and convertibles into account, it applies having regard to ownership changes during a three year look-back period rather than only at a point in time.)
Neal Armstrong and Abe Leitner. Summary of Tekmira Pharmaceuticals Proxy Statement under Mergers & Acquisitions – Cross-Border Acquisitions - Outbound – Delaware Mergers.
CRA considers that a hydro-electric royalty does not qualify as being free from GST/HST, as water does not produce electricity
ETA s. 162(2)(c) deems the supply of "an amount computed by reference to…the value of production from, any…resource" to not be a supply, so that such royalty payments are not subject ot HST or GST. A "resource" is effectively defined to include water. Nonetheless, CRA considers that "water does not produce electricity nor is electricity a product of water," so that a royalty on revenues from a hydro-electric facility is subject to HST or GST.
Neal Armstrong. Summary of 21 July 2014 Ruling 142194 under ETA, s. 162(2).
Miedzi Copper – Tax Court of Canada finds that a Holdco was able to claim ITCs as if it were an Opco
A holding company whose only significant activity was financing its Lux sub which, in turn, financed exploration companies in Poland, was entitled to full input tax credits for the GST on all the fees charged to it by its executives (who were independent contractors rather than employees) and by professional firms. Paris J indicated that ETA ss. 186(1)and (3) should be interpreted broadly in accordance with the intent that holding companies should be on the same footing as if they carried on the underlying commercial activities directly.
Neal Armstrong. Summary of Miedzi Copper Corporation, 2015 TCC 26, under ETA, s. 186(1).
CRA notes that a scheme to avoid the debt parking rules (by funnelling the debt through the GP of an LP) technically worked
A purchaser of an LP with substantial current losses and owing underwater debt to the parent of the main vendor of the LP units avoided the debt parking rules by: getting the vendor parent to first transfer the debt to the GP (a related person transfer); having its own parent purchase the GP shares at the same time as it purchased the LP units; and the having the GP sell the debt to it (also a related person transfer).
The Directorate acknowledged that this worked as a technical matter, but noted that there was a current GAAR review by Aggressive Tax Planning to which Lecavalier was germane.
The Directorate also noted that the allocation of essentially 100% of the partnership loss for the year to the purchaser was consistent with ss. 96 and 103.
Neal Armstrong. Summaries of 28 October 2014 Memo 2014-0529981I7 under s. 80.01(6) and s. 103(1).
No secondary adjustment should be made for Part XIII purposes where there is a downward s. 247(2) adjustment to a Canadian branch expense
Expenses paid by a non-resident to another are deemed to be paid by a resident Canadian for Part XIII purposes if they are deductible in computing the taxable (non-Treaty-protected) income of the payor from a Canadian branch business. If CRA applies s. 247(2) to reduce the deductible expense, the Directorate does not consider that there should be a secondary adjustment under s. 247(12) so as to impose Part XIII tax on the adjustment amount – so that the effect of the adjustment is to reduce any applicable Part XIII tax.
The Directorate notes that this result makes sense as the usual effect of the adjustment would be to produce an off-setting increase in Part XIV tax on that amount.
Neal Armstrong. Summary of 19 November 2014 Memo 2014-0530911I7 F under s. 247(12).
Income Tax Severed Letters 11 February 2015
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that the debt forgiveness rules do not apply to the transfer of a loan to the debtor on a redemption of its shares
In a simple loss-shift transaction, "Lossco" (a subsidiary) will make interest-bearing loans to its profitable Parent, and Parent will subscribe for prefs of Lossco. The subsequent unwinding transactions simply provide that Lossco will redeem the prefs by delivering those loans to Parent.
CRA ruled that this delivery of loans to the debtor would not give rise to a forgiven amount. This suggests that it is unnecessary in situations such as this to have a separate set-off agreement in which a previously created obligation to the shareholder for the redemption amount is then set-off against the loan owing by the shareholder.
As in the ruling summarized in the previous post, there was no borrowing-capacity rep.
Neal Armstrong. Summary of 2013 Ruling 2013-0498551R3 under s. 80(1) – forgiven amount.
CRA rules on a hurried (under one month) loss shift
CRA ruled on loss-shifting transactions which were to be reversed (on a cashless basis) less than a month after being implemented. This likely implies that the intragroup loan amounts were quite large – which is consistent with the unusual absence of a representation that the loans amounts were something which could have been borrowed from a bank.
In order to avoid a daylight loan, the various amounts were split up into bite-sized chunks, with the money being circled.
Neal Armstrong. Summary of 2014 Ruling 2014-0525441R3 under s. 111(1)(a).
Livingston – Tax Court of Canada narrowly construes the replacement property concept
Lyons J found that the use by the taxpayer, who was a co-owner of a dairy farm, of the proceeds of a sale of a part interest in his land co-ownership interest to purchase the interest of the other co-owner in the non-realty farming assets (e.g., the milk quota and farming equipment), which he used in continuing to carry on his dairy farming, did not entitle him to access the s. 44(1) rollover: the purchased farming assets did not "replace" the farmland he sold as required by s. 44(5)(a), as this concept required a "direct substitution" of "the same species of capital property;" and the purchased assets also were not acquired for a "similar" use to that of the farmland, as required by s. 44(5)(a.1).
Neal Armstrong – Summary of Livingston v. The Queen, 2015 TCC 24 under s. 44(5)(a).