News of Note
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
Email this ContentA 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).
Shareholders of Continental Gold, a Bermuda company with Canadian residence, will transfer their shares under a Bermuda Scheme to a new Ontario holding company
The common shareholders of Continental Gold, which is a TSX-listed Bermuda corporation with central management and control in Canada, will transfer all their shares to Continental Holdco (a newly incorporated Ontario corporation) under a Bermuda Scheme of Arrangement for the same number of Continental Holdco common shares. Taxable resident shareholders can elect under s. 85 to achieve rollover treatment. The s. 85.1 rollover is not available as Continental Gold is not a taxable Canadian corporation.
The transaction is less innocuous in the U.S. Although it fits under the description of a "B" (share-for-share) reorg or a Code s. 351 contribution, U.S. shareholders who acquired their shares before 2014 (when Continental Gold ceased to be a PFIC) generally will not be eligible for tax-free exchange treatment unless they made a timely election to hold their Continental Gold shares on a mark-to-market basis or made a "purging election" to recognize gain (and pay U.S. tax) on a deemed sale of their shares at the end of 2013.
Neal Armstrong and Abe Leitner. Summary of Continental Gold Circular under Other – Continuances/Migrations – New Canadian Holdco.
CRA considers that a partnership’s affairs can be considered to have been wound-up even if title still shows land as being held for the partnership
The s. 85(3) rollover respecting a disposition of property by a partnership to its corporate partners requires inter alia that "the affairs of the partnership were wound-up within 60 days after the disposition." CRA considers that provided beneficial ownership has been transferred within the 60-day period, it is acceptable if, due to requirements of the applicable land titles authority:
the partnership still holds legal title to the property after the 60-day period only because the parties are awaiting the valuation necessary to effect the transfer of title, and legal title to the property in question will be transferred as soon as is practical after the valuation is completed.
Neal Armstrong. Summary of 14 January 2015 T.I. 2014-0559731E5 under s. 85(3).
Income Tax Severed Letters 20 May 2015
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
DeeThree Exploration effects a butterfly spin-off of Boulder Energy
DeeThree, an Alberta TSX-listed oil and gas company, has completed a butterfly spin-off of Boulder Energy, which holds what was a major development property of DeeThree. In contrast to the recent FirstService/Collier butterfly spin-off, no tax ruling was sought, no indemnities were given respecting post-Arrangement actions that might cause the butterfly to be taxable and no tax risks were disclosed.
Similarly to FirstService/Collier, the U.S. tax disclosure contemplates that the reorganization will be treated as a qualifying Code s. 355 distribution on the basis of the form of the transactions being disregarded.
Neal Armstrong. Summary of DeeThree Circular under Spin-Offs & Distributions – Butterfly spin-offs.