News of Note
Marret Fund will convert from a forward sale fund to a conventional bond fund
Email this ContentThe Marret Investment Grade Bond Fund currently achieves deferral and capital gains treatment on an underlying portfolio of mostly foreign bonds by having entered into a forward agreement for the sale of TSX-listed companies at prices reflecting the performance of the portfolio held in other hands. This arrangement will cease to be grandfathered from the character conversion (a.k.a. derivative forward agreement) rules if the maturity date of the forward agreement of October 31, 2014 is extended.
Accordingly, the forward agreement will be settled, the resulting net capital gain will be distributed to the unitholders and the Fund will continue on investing in the underlying portfolio directly.
There will be more transactions like this.
Neal Armstrong. Summary of Marret Investment Grade Bond Fund Circular under Other – Conversions – Forward Sale Fund to Conventional Fund.
CRA rules and opines that deemed (s. 214(7)) interest on the conversion or sale of a convertible debenture is not participating debt interest
A 2012 ruling letter (2011-0418721R3) ruled that the interest coupons on a U.S.-dollar convertible note (whose terms were "plain vanilla" except that the issuer had the option to satisfy a conversion request by paying cash, and there is no period prior to maturity during which there is an unfettered right to convert) were not participating debt interest, so that the interest coupons paid to an arm’s length note purchaser (ACO) would not be subject to Part XIII tax. An amendment to this ruling letter now provides that "any" amount deemed under s. 214(7) to be a payment of interest on conversion of the Note by ACO also will not be subject to Part XIII tax.
Furthermore, CRA opined that on a sale of the note by ACO to an arm’s length Canadian-resident purchaser for cash "any amount deemed to be a payment of interest…. under subsection 214(7) would not in general constitute ‘participating debt interest’." (This presumably was given only as an opinion as such a purchaser has not been lined up.)
Neal Armstrong. Summary of 2012 Ruling 2011-0418721R3, as amended by 2014-0532411R3, under s. 212(3) – participating interest.
Income Tax Severed Letters 10 September 2014
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Provincial GAAR rulings are the new normal in loss transfer rulings
A lossco parent will not transfer losses to a profitco subsidiary under typical triangular loss-shifting techniques because profitco has public shareholders and does not wish to incur debt. Accordingly, lossco will engage in such techniques to transfer losses to a newco subsidiary (Aco), and then transfer Aco to profitco to be wound-up under s. 88(1.1) (2013-0511991R3 and 2013-0496351R3 are similar). More realistically than 2013-0496351R3, the usual borrowing capacity rep is given in relation to the lossco rather than Aco.
Similarly to 2013-0496351R3 and 2013-0504301R3, provincial GAAR rulings were given (the new normal). Also the unwinding of the loss transfer transactions will occur on a cashless basis (a somewhat older normal) – which may be safer than using payments by direction. (There is recent anecdotal evidence of CRA challenging the latter.)
Neal Armstrong. Summary of 2014 Ruling 2014-0518451R3 under s. 111(1)(a).
Porter and Bunn suggest streamlining the unduly-restrictive s. 95(2)(a)(ii)(D) rule
S. 95(2)(a)(ii)((D) typically deems interest income on a loan from one foreign affiliate (FA1) to FA2 to be active business income of FA1 where FA2 used the borrowed money for the purpose of earning income from excluded-property shares of FA3. Shawn Porter (who no longer is at Finance) and David Bunn submit that this use test is unduly restrictive. For example, it will be problematic if:
- FA2 borrows from FA1 to distribute paid-up capital which is attributable to FA3;
- Moneys borrowed by FA2 from FA1 are used on its merger with the Holdco for FA3 to redeem Holdco shareholders; or
- FA2 borrows money from FA1 to distribute PUC to Canco (viewed as a borrowing which on a "fill the hole" tracing theory relates indirectly to FA2 earning income from FA1 shares).
They suggest streamlining the rule:
[I]ncome of a particular FA would be eligible for ABI characterization in circumstances where the income is derived from amounts that are paid or payable to the particular FA…by another FA of the taxpayer to the extent the amounts are deductible by the other FA in computing income from a property of the other FA that qualifies as an excluded property throughout the particular period.
Neal Armstrong. Summary of Shawn D. Porter and David Bunn, "Is it Time to Simplify the Holding Company Rule?", International Tax Planning (Federated Press), Volume XIX, No. 2, 2014, p. 1304 under s. 95(2)(a)(ii)(D).
CRA may require a court order for determining a point of provincial law
CRA does not consider that Easingwood v. Cockroft, 2013 BCCA 182, stands for the blanket proposition that the attorney under a power of attorney for property can validly transfer the taxpayer’s property to an inter vivos trust created by the attorney, and states that it "would expect that an Attorney that is contemplating the creation of an alter ego trust would seek the affirmation of the applicable court that the particular terms of the Power of Attorney for Property provide for such a power and that the terms of the proposed trust conform with the terms of the existing will and any other relevant agreements."
Neal Armstrong. Summary of May 2014 CALU Roundtable, Q. 6, 2014-0523331C6 under s. 73(1.01)(c).
McInnes - Tax Court finds that services provided at a furnished chalet were insufficient to render it a non-rental property
In finding that a chalet which was rented out on a furnished basis was a rental property rather than a source of business income (so that the rental property restriction rule in Reg. 1100(11) applied), Masse J stated that this conclusion will be reached where the taxpayer "cannot demonstrate that the range of services provided by her are such that the [rental] payments can in substantial part ["bonne partie"] be attributed to such services."
Neal Armstrong. Summary of McInnes v. The Queen, 2014 CCI 247 under Reg. 1100(14).
Life insurance proceeds received by a CFA generally will not be added to its exempt surplus
CRA considers that, except in "very rare cases," life insurance proceeds received by a foreign subsidiary on the life of its indirect shareholder (holding it through Canco) would not be added to exempt (or taxable) surplus, so that a distribution of the proceeds would grind the basis in its shares. Given that there also would be no credit to Canco’s capital dividend account, structuring this way would be boneheaded.
Neal Armstrong. Summary of May 2014 CALU Roundtable, Q. 7, 2014-0523341C6 under Reg. 5907(2)(f).
McKesson - Boyle J referred to the taxpayer’s “pig in a poke” approach to justifying a high discount rate on intercompany receivables sales in the previous Tax Court of Canada hearing
In McKesson, Boyle J found that the taxpayer had been selling its trade receivable to its immediate Luxembourg parent (MIH) at discounts which were excessive from a transfer pricing perspective. In a subsequent decision, he has now recused himself from dealing with residual issues on the basis that taxpayer’s counsel had lied about his trial conduct and reasons for judgment in their Federal Court of Appeal factum - which would reasonably be expected to vex him sufficiently to affect his impartiality.
While accepting Boyle J’s statement that such reasons "are very clear" on important points, his explanations of the "untruths," including quotes from the extensive exchanges from the bench at trial, are illuminating:
- He had expressed concern about the taxpayer, which began with a cost of funds of nearing 5%, quadrupling this cost on the basis of laying off risk to MIH.
- The taxpayer’s approach, that (ignoring MIH’s knowledge and control as parent) MIH was "buying a pig in a poke," so that it was taking on a lot of risk, would mean that "virtually every Canadian subsidiary…[could] be re-pricing to 5 year junk rates."
- However, in his trial reasons, it had not been necessary to rely on the likely law that this parent-sub relationship could be taken into account, as on the face of the receivables purchase agreement, MIH had an out once the collection performance began to deteriorate (i.e, low risk).
Neal Armstrong. Summary of McKesson Canada Corp. v. The Queen, 2014 TCC 266 under s. 247(2).
CRA recognizes that significant amendments may not result in a new obligation
The question whether a new (post March 2013) obligation has arisen for purposes of the LIA policy definition is similar to the question whether there has been a loan disposition. On the first question, CRA states that "a change in the interest rate, an extension of the duration of loan or a change to the terms of repayment may not, in and of itself, result in a new loan. Such a determination can only be made after a review of the terms of the particular loan agreement."
Neal Armstrong. Summary of May 2014 CALU Roundtable, Q. 1, 2014-0523261C6 under s. 248(1) – LIA policy.