News of Note
Element Financial does not intend to withhold on conversion of convertible debentures
Email this ContentElement Financial is issuing convertible debentures as part of an offering to finance its acquisition of PHH for U.S.$1.4B. The preliminary prospectus states that although there is some uncertainty as to whether the excess of the fair market value of a debenture over its issue price on conversion would be participating interest (see 1 May 2009 IFA Roundtable, Q. 12, 2009-0320231C6, 23 May 2013 IFA Round Table, Q. 9, 2012 Ruling 2011-0418721R3, 2013 CTF Roundtable, Q. 8 and 18 March 2014 T.I. 2013-0515631E5), Element does not currently intend to withhold on conversion by a non-resident.
Neal Armstrong. Summary of preliminary short form prospectus of Element Financial Corporation under Offerings – Convertible Debentures.
True North Apartment REIT to acquire apartments from Drimmer in consideration for traditional exchangeable LP units
Subsidiary LPs of True North Apartment REIT are proposing to acquire 29 apartment buildings from entities owned by Daniel Drimmer (who also is its CEO and owns its manager) for consideration including exchangeable LP units, so that the effective interest of Drimmer in the REIT will increase from 18.9% to 41.2%. Unlike Slate Retail REIT, holders of the exchangeable units have direct exchange rights against the REIT itself.
Neal Armstrong. Summary of Circular of True North Apartment REIT under Other – Asset Purchases.
Francis & Associates – Tax Court of Canada finds that substantively-correct bad debt deductions cannot be claimed in an amended return
Due to problems with its accounting system, a law firm did not discover until late in 2005 that billings made in 2002 to 2004 and which had become bad in those years had not been written off in the accounts. It corrected this and other issues through the filing by its partners of amended returns for those years, which were reassessed, but with the bad debt deductions being denied.
Bocock J denied the deductions. This is questionable. The authorities cited by him support the proposition that receivables which become bad in a particular year cannot be claimed as a bad debt in a return for another year, rather than the proposition that they cannot be claimed as a bad debt in an amended return for that year.
However, he found that client-related disbursements which the firm had failed to bill to the clients could be deducted on general principles, which sounds right.
Neal Armstrong. Summary of Francis & Associates v. The Queen, 2014 DTC 1146 [at 3468], 2014 TCC 137 under s. 20(1)(p)(i).
Morris – Tax Court of Canada finds that s. 18(3.1) does not apply to “general repairs and cosmetic touch-ups"
S. 18(3.1) requires the capitalization of various expenses which are incurred during the period of "construction, renovation or alteration" of a building. Campbell J found that this phrase did not encompass "general repairs and cosmetic touch-ups" such as roof repairs and replacing flooring and closets.
Neal Armstrong. Summaries of Morris v. The Queen, 2014 DTC 1149 [at 3481], 2014 TCC 142 under s. 18(3.1) and s. 18(1)(a) – Start-up and liquidation costs.
Barrasso – Tax Court of Canada is unsympathetic to the problem of a potential phantom capital gain arising from the failure under GAAR of a value-shift transaction
The taxpayer generated capital losses (totalling $65M) by engaging in essentially the same stock-dividend/value shift transactions which had failed in 1207192 and Triad Gestco (i.e., receiving a stock dividend of high-low pref from his Quebec company in order to shift all the value away from his common shares, and then selling those common shares for their now-nominal value to his sons). The scheme was even more aggressive than in the other cases because the company’s only asset was a promissory note which he had issued to it in subscribing (one day earlier) for the common shares.
The taxpayer tried to distinguish the other cases on the basis that they had corporate taxpayers – whereas he as an individual would inevitably realize an offsetting capital gain on his prefs no later than death. Paris J found that this difference did not detract from the contrived nature of the loss, and also noted that the taxpayer had not requested an upward adjustment to the ACB of his prefs (corresponding to the loss on his common shares denied under GAAR) under s. 245(6). The implication may be that the taxpayer should have requested such an adjustment, and could not now use his failure to do so for an argument that it was unfair to deny the capital loss.
As a taxpayer apparently has no ability to make a s. 245(6) adjustment himself (see Copthorne) and in this case it now is too late to request one, the taxpayer or his estate now may face the ultimate realization of a phantom capital gain on his prefs. (The promissory note might not be a "commercial debt obligation," but forgiving it might give rise to a taxable shareholder benefit.)
Neal Armstrong. Summary of Barrasso v. The Queen, 2014 CCI 156 under s. 245(4).
Spruce Credit Union – Federal Court of Appeal confirms that choosing the most tax effective transaction which nonetheless still has a primary non-tax purpose does not render it an avoidance transaction
Trudel JA affirmed an analysis of Boyle J. that where a transaction was engaged in primarily for non-tax reasons (in this case, a dividend paid to credit union shareholders because they needed the cash), then the fact that the particular form of the transaction (a dividend) was more tax effective than some other transaction that would accomplish a similar result (e.g., making the payment in proportion to previous premiums paid by them) does not make the transaction into an avoidance transaction for GAAR purposes.
Neal Armstrong. Summaries of The Queen v. Spruce Credit Union, 2014 FCA 143 under s. 245(3) and under s. 137.1(10)(a).
CRA confirms that payroll for inter-provincial income allocation purposes is not reduced by employee expenses and takes into account payroll of PEs outside Canada
The inter-provincial income allocation formula in Reg. 402(3) gives half weight to the proportion of the total salaries and wages of the corporation which is paid to employees of provincial permanent establishments. Notwithstanding that "salary or wages" is defined in s. 248(1) as income from employment under subdivision a, so that it is reduced by s. 8 expenses, CRA interprets the phrase in the Reg 402(3) as the (gross) amounts paid – but otherwise applies the s. 248(1) definition for Reg 402(3) purposes so that, for example, stock option benefits are included.
CRA interprets the denominator of the Reg 402(3) payroll fraction as including the employment income paid to non-resident employees attached to permanent establishments of the corporation outside Canada.
Neal Armstrong. Summary of 11 March 2014 Memo 2013-0506801I7 under Reg 402(3).
Income Tax Severed Letters 4 June 2014
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Can a transaction have more than one main purpose?
"One of the main reasons," and similar phrases appearing in the Act and treaties, are at odds with ordinary English usage, which indicates that there can only be one main purpose. Nat Boidman suggests that the UK judicial approach, of effectively turning this phrase into a simple "main purpose" test, is preferable to that in Groupe Honco, which effectively dropped the word "main" and converted the phrase into a "one of the purposes" test.
Neal Armstrong. Summary of Nathan Boidman, "One of the Main Purposes Test", Canadian Tax Highlights, Vol. 22, No. 5, May 2014, p. 9, under s. 83(2.1).
HHT Investments - Ontario Superior Court finds that the conversion of a public corporation into a REIT qualifies as a corporate plan of arrangement
Although s. 182 of the OBCA (and similar provisions of the CBCA and various provincial business corporations acts) describe corporate plans of arrangement, a conversion of a public corporation to a REIT should qualify for plan of arrangement treatment on the grounds that it is "any other reorganization or scheme involving the business or affairs of the corporation or of any or all of the holders of its securities" under s. 182(1)(h) of the OBCA.
Summary of Re HHT Investments Inc., 119 OR (3d) 473, 2014 ONSC 1582, under OBCA, s. 182.