News of Note
Revett Minerals is taking advantage of a business reversal to continue to Delaware
Email this ContentRevett is CBCA corporation holding, through US subsidiaries, a U.S. mine at which production has been temporarily suspended as well as a US deposit in development. It is proposing to continue out of Canada and be "domesticated" as a Delaware corporation. Although this will result in a deemed disposition of all its property (s. 128.1(4)(b)) and an exit tax calculated at 5% of NAV minus PUC (s. 219.1), management does not anticipate any material Canadian income tax under these rules provided that the share price is below $2.25 per share – which generally has been the case since the U.S. mining operations were suspended.
As discussed in a previous post on another transaction, the continuance of Gastar Exploration (with a U.S. natural gas business) from Alberta to Delaware was regarded from a U.S. tax perspective as entailing a transfer by Gastar of all its assets to the new Delaware corporation (Gastar Delaware), followed by a distribution by Gastar of Gastar Delaware to its shareholders. This distribution step was problematic as Gastar Delaware was a United States real property holding company for FIRPTA purposes.
Notwithstanding that US mines are FIRPTA assets, Revett management does not anticipate that the domesticated Revett will be a USRPHC. The disclosure does not describe the analysis in support of this view.
Neal Armstrong and Abe Leitner. Summary of Revett Minerals Proxy Circular under Public Transactions - Other – Continuances.
CRA generally will not assess interest where a “good” (ETA s. 186(1)-qualified) holding company does not self-assess itself for GST on imported taxable supplies
Although in a broad sense, ETA s. 186(1) treats a Holdco holding an Opco with an exclusive commercial activity the same as if it carried on the commercial activity itself, strictly speaking all that s. 186(1) does is entitle the Holdco to input tax credits on related purchases. Accordingly, s. 186(1) does not apply to relieve Holdco of the obligation to self-assess itself for purchases of imported taxable supplies relating to Opco (and then claim an off-setting ITC).
However, CRA has now indicated that where a registrant fails to account for HST on an imported taxable supply which should have been self-assessed and has not claimed an ITC for those amounts, administrative tolerance generally will be exercised so that no interest is assessed.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 34 (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx) under ETA, s. 217(1) – imported taxable supply.
CRA is prepared to apply s. 248(28) to avoid a double inclusion arising under the upstream loan rules
Barnicke and Huynh have seen an unpublished interpretation. If a grandchild foreign subsidiary (FA 2) of Canco which made a loan to it is wound-up into the immediate subsidiary (FA 1), this will result in a second income inclusion to Canco under the upstream loan rule (s. 90(6)) – yet Canco will only be entitled under s. 90(9) to one deduction for the exempt surplus of FA 2 which moved up to FA 1 on the liquidation. However, CRA will apply s. 248(28)(a) to avoid such double inclusion.
Similar issues can arise if FA 1 and FA 2 merge.
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "Upstream Loans: CRA Update," Canadian Tax Highlights, Vol. 21, No. 12, December 2013, p. 3 under s. 90(6).
A. P. Toldo - Tax Court of Canada declines to expand the indirect use doctrine in Penn Ventilator
D'Arcy J recognized the proposition that a taxpayer with a money-lending business potentially "may" be able to deduct interest on general principles rather than under s. 20(1)(c). Furthermore, a taxpayer with sufficient retained earnings or stated capital, and which incurs interest-bearing debt to redeem a shareholder for compelling business reasons, can in this "exceptional fact situation" establish a qualifying indirect use for purposes of interest deductibility under s. 20(1)(c). However, neither proposition was established on the evidence before him.
Neal Armstrong. Summaries of A.P. Toldo Holding Corporation v. The Queen, 2013 TCC 416 under s. 20(1)(c) and s. 18(1)(b) - capital expenditure v. expense - financing expenditures.
McKesson – Tax Court of Canada reduces a cross-border receivables financing rate from 27% to 12.5% p.a.
In order to largely eliminate the Canadian taxpayer's taxable income, its ultimate US parent directed it to sell its receivables as they arose to its immediate Luxembourg parent at a discount of 2.206%, which worked out to an annualized rate of 27% given that the receivables on average were collected in 30 days. Boyle J found, in reviewing CRA’s transfer-pricing adjustment to the taxpayer under ss. 247(2)(a) and (c), that he could adjust the discount rate and, in that connection, tinker with the actual terms of the receivables transfer agreement to change them to the minimum extent necessary to accord with what arm’s length negotiations would have produced. However, he was inclined to think that it was inappropriate to (and he did not) impute changes to the fundamental terms of the deal – for example, by inquiring what the terms would have been if the receivables had been sold on a recourse rather than a non-recourse basis.
In the end, he found that CRA’s assumption that a discount rate corresponding to an annualized rate of around 12.5% (which was within the range he calculated) was arm’s length, had not been demolished by the taxpayer. (It didn’t augur well when, respecting one argument, he stated (para. 246), "Overall I can say that never have I seen so much time and effort by an Appellant to put forward such an untenable position so strongly and seriously.")
An assessment for Part XIII tax under s. 214(3)(a) for a correlative benefit to the Luxembourg parent also was confirmed. As this benefit was distinct from the primary transfer-pricing adjustment to the taxpayer, a five-year assessment limit in the Treaty did not apply.
Neal Armstrong. Summaries of McKesson Canada Corp. v. The Queen, 2013 TCC 404 under s. 247(2), s. 247(4), Treaties – Art. 9, General Concepts – Intention and General Concepts – Evidence.
Aridi - Tax Court of Canada finds that bad advice could be relied upon for statute-barring purposes
In a recently-noticed case, the taxpayer was reassessed outside the normal reassessment period for a capital gain he had realized on disposing of ½ of his interest in a rental property. He had been told by his accountant that recognition of this gain could be deferred until the other ½ interest was disposed of.
Notwithstanding that essentially all the somewhat unfavourable cases in this area were cited to him (e.g., Snowball, College Park and Gebhart) and virtually none of the favourable ones (e.g., Reilly, Chaumont, Envision, Gauthier and Petric), Hogan J found that there was no "neglect" in the taxpayer’s reliance on this incorrect advice (which the taxpayer had probed before accepting), so that the reassessment was statute-barred.
This suggests that you generally are off the hook for the all bad advice you have given once the applicable reassessment periods have passed.
Neal Armstrong. Summary of Aridi v. The Queen, 2013 DTC 1189, 2013 TCC 74 under s. 152(4)(a)(i).
The base erosion test in the LOB Article of the Canada-U.S. Treaty may be inadequate
The OECD commentary distinguishes between the situation where a third-state resident (who would not be entitled to good Treaty benefits if it invested directly in the source company) uses a "direct conduit" (i.e., it is the majority owner of a "Recipient" company resident in a country with a good Treaty with the source country) and where it uses a "steppingstone conduit" (i.e., it holds debt claims on the revenue streams received by the Recipient company.)
Yoshimura explains in detail that the Limitations on Benefits Article of the Japan-U.S. Treaty (which is similar to that in the Canada-U.S. Treaty) "can handle typical direct conduits while it cannot deal with typical steppingstone conduits."
Neal Armstrong. Summary of Koichiro Yoshimura, "Clarifying the Meaning of 'Beneficial Owner' in Tax Treaties", Tax Notes International, November 25, 2013, p. 761 under Treaties – Art. 29A.
Devon – Tax Court of Canada finds that a partnership property drop-down to a 2nd-tier partnership did not preclude continued successored expense deductions
CRA unsuccessfully took the position before Hogan J that when, following an acquisition of control of a corporation holding an oil and gas partnership, the partnership properties were dropped down to a 2nd tier partnership, the benefit of the look-through rule in s. 66.7(10)(j) was lost, so that the corporation could no longer claim successor deductions in respect of those properties.
In addition to this successoring point, Devon stands for the proposition that "in a tiered partnership, the source and location of income is preserved through each level of partnership."
Neal Armstrong. Summaries of Devon Canada Corp. v. The Queen, 2013 TCC 415 under s. 66.7(10)(j) and s. 102(2).
Coventry Resources proposes to sells its major assets for shares, to be distributed under the s. 84(4) sales proceeds rule
Chalice Gold (an Australian public company) is interested in the principal (Ontario) assets of Coventry Resources (a micro-cap BC public company) but not in its Alaskan project. A proposed B.C. plan of arrangement contemplates that Coventry will sell its Ontario subsidiaries to a subsidiary of Chalice in consideration for Chalice shares, and then effect a stated capital distribution of the Chalice shares to the Coventry shareholders. Coventry will be left with Alaska.
This PUC distribution clearly fits within ss. 84(4)(a) and (b), so that there would be no question of needing a ruling. It is interesting to see a Canadian plan of arrangement governing what effectively is a cross-border merger with a Canadian target.
Neal Armstrong. Summary of Circular for Chalice Gold acquisition of Coventry Resources assets for shares under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Asset sale/share distribution.
Employee stock option shares do not qualify as flow-through shares
A share issued on exercise of an employee stock option does not qualify as a flow-through share because the below-market exercise price constitutes a form of assistance that renders it a prescribed share.
Neal Armstrong. Summary of 21 November 2013 T.I. 2013-0497641E5 under Reg. 6202.1(2)(b).