News of Note
Sulliden/Rio Alto merger is structured to qualify as a s. 368(a) reorg
Email this ContentSulliden Gold, whose principal asset is a Peruvian subsidiary holding a development property, is effecting a s. 86 spin-off to its shareholders of a Quebec exploration subsidiary (SpinCo) before its outstanding shares are transferred to Rio Alto Mining on a s. 85.1 exchange for Rio Alto shares.
In order that this transaction likely can qualify as a s. 368(a) reorganization under the Code, Rio Alto will then transfer the Sulliden shares to a newly-incorporated Rio Alto sub so that they can amalgamate. Although this will occur as a conventional "continuation" style amalgamation, the U.S. disclosure considers that a "substantially all" requirement must be satisfied, which implies that the transaction is viewed as a reverse triangular merger under s. 368(a)(2)(E) rather than as a forward triangular merger governed by s. 368(a)(2)(D). This "substantially all" requirement is expected to be satisfied based in part on the distributed Quebec subsidiary representing less than 10% of Sulliden’s net assets.
A 1992 temporary PFIC regulation indicates that the transaction would not qualify for nonrecognition given that Sulliden is a PFIC and Rio Alto is not. The disclosure suggests that the transaction nonetheless should qualify for nonrecognition if these regulations are not finalized in their current form, notwithstanding that the statute itself (in s. 1291(f)) provides that to the extent provided in regulations a disposition of PFIC shares will be taxable even if it would otherwise qualify for nonrecognition: the disclosure considers that the statute is not self operative.
Neal Armstrong and Abe Leitner. Summary of Rio Alto Circular under Mergers & Acquisitions – Mergers – Share-for-share.
CRA considers that settlement of a withdrawing partner’s interest with partnership property will not scupper the s. 98(6) rollover
The rollover under s. 98(6) for the replacement of a Canadian partnership by another partnership with the same or fewer partners requires that all of the property of the predecessor partnership be transferred to the new partnership. CRA considers that this requirement will be satisfied even though partnership property was paid out to a withdrawing partner whose departure caused the new partnership to arise at law – provided that all of the property of the old partnership was transferred directly by it to the new partnership immediately after the settlement of the withdrawing partner's interest.
Neal Armstrong. Summary of 30 June 2014 T.I. 2014-0522181E5 F under s. 98(6).
CRA finds that a non-resident partnership breaks a closely-related group connection for HST/GST purposes
Among other requirements for the HST/GST nil consideration election, those electing must be specified members of a "qualifying group" of corporations or Canadian partnerships which are closely related. This means that two Canadian corporations which are sisters by virtue of being at the bottom of a wholly-owned stack of immediate Canadian and more remote U.S. corporations which, in turn, have a common US parent, will be eligible as members of a qualifying group. However, if there instead is a US partnership in one of the two chains, this will break the required connection, so that the election is not available. It is implicit in this that partners of a partnership do not own partnership property including a corporate subsidiary.
Neal Armstrong. Summary of 4 February 2014 Interpretation 159039 under ETA – s. 156(1) – qualifying group.
CRA ignores its archived Bulletin on lease cancellation payments
IT-359R2 (Archived) dated 20 December 1983 states that unless "renting property forms part or all of a business being carried on" by the tenant, an "amount received by a tenant… from a landlord, permitting the cancellation of a lease is a capital rather than an income receipt to the recipient."
Crisp writing like this is an embarrassment to CRA a generation later. When asked about the treatment as an income or capital receipt of a lease cancellation payment received by a tenant, CRA ignored IT-359R2 and referred instead to the general discussion in IT-365R2, paras. 8 and 9 of the surrogatum principle.
Neal Armstrong. Summary of 23 June 2014 T.I. 2014-0519401E5 under s. 9 – compensation payments.
Income Tax Severed Letters 23 July 2014
This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that a fee received by a broker for finding a purchaser for a financial business is not HST/GST exempt
CRA found that a fee earned by a non-resident broker for assistance in finding a purchaser to close on an exempt sale of a financial operation was predominantly paid for taxable advisory services – as well as being tainted by the new s. (r.4) rule as being for "customer assistance" provided before the sale.
In addition to the absurdity of the implication that such fees only avoid (r.4) if the dealer does not provide any customer assistance before generating its fee on closing, this appears to be contrary to Global Cash Access - which suggests that because the services of the dealer are of no use to the client unless the sale closes, arranging for that financial service is what the client is paying for rather than the pre-closing "advice" and "assistance."
Neal Armstrong. Summary of 4 February 2014 Interpretation 106288 under ETA – s. 123(1) – financial service.
The long-term off-take agreement model may justify use of a cost-plus approach to the transfer-pricing of mine sales to an affiliate
In order that a mining company can eliminate risk with respect to the price of production from a new mine, it may enter into an "off-take agreement" with an arm’s length distributor for the sale of the mine production at a fixed or certain price. Harold McClure suggests that a similar arrangement entered into instead with an affiliated distributor "poses a potential exception to the claim that the cost-plus approach is not a viable method" to establish a transfer price for sales of product by the mining company to its affiliate. This point appears to be at least partly what is at issue in the Cameco transfer-pricing litigation (so far reported only on document–production issues).
Neal Armstrong. Summary of J. Harold McClure, "Evaluating Whether a Distribution Affiliate Pays Arm's-Length Prices for Mining Products", Journal of International Taxation, July 2014, p. 33 under s. 247(2).
CRA’s exclusion of private trusts from the FATCA obligations of Canadian financial institutions is contrary to what the U.S. intended
CRA Guidance clarifies (see Example C) that private trusts are not subject to the due diligence and reporting obligations applicable under the Canadian FATCA rules to Canadian financial institutions (although as nonfinancial foreign entities they must still report any controlling U.S. person.)
Peter A. Cotorceanu, a U.S. tax lawyer with UBS, is quoted as saying that "Canada's decision to narrow the definition of financial institution could…lead to fairness concerns" for other jurisdictions whose private trusts are subject to the FATCA financial institution requirements and that "it's clear that [this exclusion]… wouldn't have been the understanding of Treasury when they wrote the IGAs."
Neal Armstrong. Summary of Kristen A. Parillo, "Canada's FATCA Guidance: Too Much Discretion Used?," Tax Notes International, July 14, 2014, p. 73 under s. 263(2).
CRA rules that the s. 115.2 safe harbour can apply to illiquid loans acquired on original issue
In specified circumstances s. 115(2)(c) deems non-resident "members" of a partnership not to be carrying on business in Canada by virtue only of investment management and administration services provided by a Canadian manager in respect of partnership investments, including "purchasing and selling qualified investments" such as indebtedness. CRA has ruled that this safe harbour applies where what is being purchased by the partnership is original issue illiquid debt, including of private companies. This is consistent with 2007-0224751R3.
Here there was a two-tier partnership structure where the management services were provided both to the "master" (i.e., bottom) partnership and to upper-tier "feeder" limited partnerships – so that the favourable ruling appears to implicitly accept that non-resident limited partners in the feeder partnerships are members of the master partnership.
Neal Armstrong. Summary of 2014 Ruling 2013-0513431R3 under s. 115.2(1) – designated investment services.
ROI Public Funds terminated forward/mirror fund structure and merged on a taxable basis to create Dream Hard Asset Alternative Trust
DREAM (formerly Dundee) acquired the rights to manage various ROI mutual funds. These Funds held much of their Canadian real estate and fixed income portfolios indirectly through the terms of forward agreements with a Canadian bank, which in turn held those assets in "Reference Funds." They would have ceased to be grandfathered from the character conversion rules at the end of 2014. Their forwards were cash settled and they merged into a new mutual fund trust, Dream Hard Asset Alternative Trust. ("Hard" is an adjective, not an adverb.)
The form of the merger was quite similar to a s. 132.2 merger: after some preliminary transactions to address the mirror "Reference Fund" structure, the Funds sold their assets to the new Trust for units, and then terminated by distributing those Trust units to their unitholders. However, the merger occurred on a taxable basis, which was not a significant issue due to the tax efficiency of the current grandfathered forward sale structure.
The new TSX-listed Trust is subject to potential SIFT tax on most of its assets. However, an estimated 90% of its distributions for 2015 will be capital distributions due to high depreciation.
Neal Armstrong. Summary of Prospectus of Dream Hard Asset Alternative Trust and of Circulars of ROI Public Funds under Mergers & Acquisitions – REIT/Income Fund/LP Acqisitions – Taxable Trust Mergers.