News of Note
Bolton Estate – English Chancery Division grants rectification order to give effect to a specific intent to accomplish a particular transaction at the time of botched drafting
Email this ContentThe English Chancery Division has granted an order rectifying an estate Deed of Variation on the basis of the demonstration of a specific intent at the time for the Deed to accomplish a transfer of all of the estate property in question to four charities rather than merely a transfer of the residue of the estate to the charities. Once this was established, it did not matter that the original motivation for the Deed was to save inheritance tax.
Although the application was successful, the tests to be satisfied likely were more rigorous than would apply to an application in a Canadian common law province.
Neal Armstrong. Summary of Giles (as administratrix of Hilda Bolton estate) v. Royal National Institute for the Blind & Ors, [2014] BTC 24, [2014] EWHC 1373 (Ch) under General Concepts – Rectification.
CRA permits multiple access to the small business deduction following the conversion of a professional partnership to a corporation
CRA has ruled on the conversion of a professional partnership into a CCPC (Newco) under ss. 85(2) and (3), following which individual partners will provide their respective services to Newco through their personal corporations. Their corporations are not required to share the small business deduction under the specified partnership income rules provided that they are not considered to be in partnership with each other. CRA accepted a representation that the professional corporations are not partners of each other, including representations that each such corporation is free to compete with Newco. CRA also ruled that the personal corporations did not carry on personal services businesses.
On the partnership-to-Newco conversion, the requirement in s. 85(3) that the partnership property immediately before the winding-up consist exclusively property received as consideration for the drop-down of eligible property to Newco (or money) was satisfied by having Newco acquire any non-eligible property of the partnership as consideration for the assumption of liabilities rather than for issuing promissory notes or preferred shares. Furthermore, the promissory note and preferred share consideration was handled on the basis of issuing one note and one share corresponding to each of the partners, but with a representation that this consideration was beneficially acquired by the partnership rather than by the respective partners – notwithstanding that the partnership was wound up a day later with each partner receiving ‘his or her" preferred share and promissory note on the winding-up. No s. 85(2) or (3) rulings were requested respecting these conversion transactions.
Neal Armstrong. Summaries of 2012 Ruling 2011-0392041R3 under s. 125(7) – specified partnership income and s. 85(3).
Brookfield Property Partners’ second-stage acquisition of Brookfield Office Properties shares includes an exchangeable LP unit option and a deemed dividend option
Brookfield Property Partners ("BPY") is engaging in a second-stage transaction under a Plan of Arrangement to acquire the common shares of Brookfield Office Properties Inc. ("BPO") which were not tendered to an offer made by it in February 2014.
As in the previous offer, the consideration to be provided is cash or BPY units (with the aggregate consideration fixed at approximately 67% units and 33% cash) – except that (again as before) Canadian-resident BPO shareholders can choose to receive exchangeable units of an indirect subsidiary Ontario LP ("Exchange LP") of BPY in order to elect under s. 97(2). Perhaps in order to fit within the exchangeable share structure blessed in the Explanatory Notes on derivative forward agreements, the exchangeable units are only retractable against Exchange LP for BPY units, with no direct exchange right with BPY – although on retraction BPY has an overriding call right to acquire the exchangeable units.
An additional feature not present in the previous Offer is that BPO common shareholders also can elect to have their common shares redeemed by BPO itself for BPY units or cash, giving rise to a deemed dividend of over half the value of the consideration.
Convertible preferred shareholders of BPO generally have the option of exchanging their shares for preferred shares of an indirect BPY subsidiary which is expected to qualify as a mutual fund corporation.
Neal Armstrong. Summary of Circular for Brookfield Property Partners second-stage acquisition of Brookfield Office Properties under Mergers & Acquisitions – Subsequent Acquisition Transactions.
CRA allocates upper tier debt on a pro rata basis in a cross-border butterfly for purposes of applying the 10% limitation rule in s. 55(3.1)(b)(i)(A)(II)
In connection with a spin-off by a non-resident public company (Foreign PubCo) of its shares of a non-resident subsidiary (Foreign Spinco), there will be a butterfly split-up of an indirect Canadian subsidiary (DC) indirectly holding Canadian portions of the two businesses in question, so that the Canadian transferee corporation (TC) of DC will be a subsidiary of Foreign Spinco. In connection with the s. 55(3.1)(b)(i)(A)(II) rule, which requires that at all times less than 10% of the fair market value of the shares of Foreign Spinco be derived from shares of DC or TC, CRA indicated that any indebtedness of Foreign SpinCo will be considered to reduce the FMV of each property of Foreign SpinCo pro rata in proportion to the relative FMV of all property of Foreign SpinCo. As with other cross-border butterflies, there will be a three-party share exchange agreement - see 2013 CTF Annual Roundtable, Q. 11.
CRA did not rule, one way or the other, that a preliminary share capital reorganization of DC, under which the old common shares will be exchanged for special butterfly shares and new common shares with the same attributes as the old common shares except for the prior rights of the butterfly shares, will qualify under s. 86. For purposes of categorization of the types of property of DC, current and non-current pension liabilities will reduce cash or near-cash, or business, assets respectively.
Neal Armstrong. Summaries of 2013 Ruling 2013-0491651R3 under s. 55(1) – distribution, s. 55(3.1)(a), s. 55(3.1)(b)(i) and s. 86(1).
Joint Committee Treaty Shopping Submission
The CBA/CPA Joint Committee made its submissions today to Finance on the February 2014 Budget treaty shopping proposals.
CRA finds that a Canadian equipment installation project which exceeded 12 months, including on-site preparation of plans and final testing, was a permanent establishment
CRA found that a contract of a French company to install specialized equipment at a Canadian factory of an arm’s length Canadian company gave rise to a Canadian permanent establishment of it given its general on-site responsibility for ensuring a successful project and given that the the project lasted more than 12 months including preparing detailed specs on-site and final testing – so that the 12 month safe harbour for installation projects in Art. 5, para. 3 of the Canada-France Convention was not available. The Directorate’s analysis essentially stopped after finding that the project was an installation project that lasted more than 12 months, so this may imply (see also Dudney) a view that installation projects which exceed this limit will invariably be pe’s on general principles.
Neal Armstrong. Summary of 11 April 2014 T.I. 2013-0474851I7 F under Treaties – Art. 5.
Hakki – English Court of Appeal finds that poker winnings of a professional gambler were not from a trade or business
A U.K. poker gambler, who consistently earned around £500 a week by carefully picking tables and refraining from making bets until the situation seemed favourable, was found not to be engaged in a trade or business. This might be more generous than the Canadian authorities, which may suggest that a gambler will become taxable on winnings when "a clear and consistent record of accomplishment in poker" is established: Alarie, see also Balanko, Leblanc, and 3 April 2014 T.I. 2013-0512371E5 F.
Neal Armstrong. Summary of Hakki v. Secretary of State for Work and Pensions & Anor, [2014] BTC 22, [2014] EWCA Civ 530 under s. 3.
CRA finds that a separate copyright royalty paid for the use of music in a film is exempted from withholding
Although copyright royalties for the production or reproduction of musical or artistic works generally are exempted under s. 212(1)(d)(vi), under s. 212(5) this exemption does not apply (in the absence of Treaty relief) where the payments are for the right to use a film in Canada. CRA does not consider that this exclusion will apply where separate copyright royalties are paid to a non-resident for the right to reproduce music which is used in a film.
Neal Armstrong. Summary of 1 March 2014 T.I. 2013-0514291E5 F under s. 212(1)(d)(vi) (see also 2011-0424221I7).
CRA finds that a partnership is transparent for Treaty gains exemption purposes
The gains exemption in the Canada-Singapore Convention does not apply to "gains from the alienation of shares of a company, or of an interest in a partnership or a trust, the property of which consists principally of immovable property… ." Given this "consists of" rather than "derived from" wording, CRA accepts that this provision does not apply to a sale by a Singapore resident of shares of a Canadian company (Canco) which does not directly hold Canadian real estate. However, where the Canco held Quebec immovable property through two partnerships, CRA considered that the partnerships
are not distinct persons for purposes of the Convention and that their respective patrimonies can be assimilated to that of their members [so that] the Canadian immovable properties which are held by means of [them] should be considered as being directly held by Canco to the extent of its interests in them.
Accordingly, the gain on selling Canco shares was not Treaty-exempt. Given that the Treaty wording quoted above treats partnership interests as distinct and that a particular partner does not own partnership property, this interpretation is debatable.
Neal Armstrong. Summary of 14 April 2014 Memo 2013-0516151I7 F under Treaties – Art. 13.
Income Tax Severed Letters 14 May 2014
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.