News of Note
CRA would apply the transfer pricing rule to an arm’s length group sale
Email this ContentA U.S. public company (Publico) and various subsidiaries, including a great-grandchild Canadian subsidiary (Canco) sold a business to an arm’s length non-resident purchaser (Acquireco1). At closing, Canco transferred its assets of the business to an Acquireco1 subsidiary for their book value, which did not reflect significant value for intangible assets.
Head Office was inclined to apply s. 247(2) to Canco (presumably to impute higher proceeds for the intangibles) without any explanation of the basis for applying this rule to an arm’s length sale. Publico received from Acquireco1 any excess of the consolidated sale price over the portions thereof paid to its subsidiaries, so that in that broad respect the value of the Canadian intangibles was paid to it. After asserting that concurrence under s. 56(2) can be "passive or implicit," Head Office found that the payment of a dividend to the immediate non-resident parent of Canco (Parent) should be imputed under ss. 56(2) and 214(3)(a), on the basis that Parent had concurred in the conferral of a benefit on Publico.
The rule in s. 247(12) (deeming secondary adjustment amounts to be dividends) did not apply as its effective date was subsequent to the transactions.
Neal Armstrong. Summaries of 15 November 2013 Memo 2013-0478621I7 F under s. 247(2), s. 56(2) and s. 69(4).
CRA accepts that an off-shore campus of a Canadian university qualifies as a business for source deduction purposes
Reg. 104(2) provides that no source deductions are required for non-resident employees who do not perform any services in Canada except for remuneration described in s. 115(2)(e)(i) paid to former Canadian residents. S. 115(2)(e)(i) references remuneration paid by a resident to a non-resident who is exempt from non-Canadian income tax unless inter alia it is paid "in connection with ... the rendering of services for the non-resident person’s employer ... in the ordinary course of a business carried on by the employer."
The Directorate accepted that remuneration paid to former Canadian residents by a campus of a Canadian university located in a sunny clime (where there was no local income tax) qualified for the "business" services exemption quoted above, so that no source deductions were required (although T4s were required to be issued).
Neal Armstrong. Summary of 17 June 2008 Memo 2008-0276721I7 under Reg. 104(2).
Income Tax Severed Letters 18 December 2013; Holiday Schedule
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Releases for the next two weeks will fall on Monday (23 December and 30 December). Wednesday releases will resume on 8 January 2014.
Cogesco Sevices – a penalty imposed under an ambiguous provision was successfully challenged in the Federal Court
A non-resident corporation was assessed penalties under s. 162(2.1) for its failure to file returns (although it had no substantive liability due to losses). Its request for relief under s. 220(3.1) for the pre-2010 penalties was premised on the law being in a "state of flux" until the Federal Court of Appeal decision in Exida.com (which found in that year that a penalty instead was exigible under another section).
CRA denied the request on the basis that this decision had settled the matter. The Federal Court granted the non-resident corporation’s application for judicial relief on the basis that this did not at all address the taxpayer’s requested basis for relief.
Neal Armstrong Summary of Cogesco Sevices Ltd. v. Attorney General of Canada, 2013 CF 1238, under s. 220(3.1).
The option exchange on the Mitel acquisition of Aastra will reflect the worst of the exchange ratio and the s. 7(1.4) rule
Mitel is proposing to acquire Aastra under a CBCA plan of arrangement, with U.S.$6.52 of cash and 3.6 Mitel common shares being paid for each Aastra share. Mitel will sign and return completed s. 85 election forms that are provided to it within 90 days of the effective date, but is not offering any website assistance in this regard. The disclosure is non-committal as to whether Aastra will be amalgamated post-arrangement.
Each Aastra employee stock options will be exchanged for an option on that number of Mitel common shares equal to the "Exchange Ratio." The Exchange Ratio is equal to 3.6, plus $6.52 divided by the 5-day VWAP of Mitel shares immediately preceding the Arrangement (i.e., the cash consideration is converted into an equivalent Mitel share, so that the Exchange Ratio is increased to around 4.3).
The plan of arrangement states that the exercise price under the replacement option will equal the greater of: the old exercise price divided by the Exchange Ratio; and "such minimum amount that meets the requirements of paragraph 7(1.4)(c)," i.e., the exercise price that results in the in-the-money value of the replacement option (based on the Mitel share value immediately after the option exchange) not exceeding the in-the-money value of the old options (based on the Aastra share value immediately before the exchange). This does not appear to be a raw deal for the option holders as such value of the Aastra shares would reflect the cash consideration, given that shareholder approval would have been achieved.
Neal Armstrong. Summary of Circular of Aastra Technologies under Mergers & Acquisitions – Mergers – Shares for Shares and Cash.
CRA finds that the use of a family trust to pay family expenses did not work
Father, who was the beneficiary of a Quebec family trust along with his children, distributed qua trustee the trust income to bank accounts for the children, with those amounts immediately being paid "back" to him to reimburse him for specific and "general" expenses which he had made for their supposed benefit.
Although these arrangements were less sloppy than in Degrace and Langer, CRA nonetheless found that the distributions were not income of the children as these amounts were not at their disposal, and were received by them as mandataries for him. However, the same mandatary characterization established that the trust was entitled to a s. 104(6) deduction for the income which effectively had been distributed to him.
Neal Armstrong. Summaries of 10 July 2013 Memo 2013-0475501I7 F under s. 104(13), s. 104(6) and s. 105(1).
CRA accepts that no nominee agreement is required if the facts are obvious
Title to daughter’s home was acquired in her mother’s name due to lender requirements, but daughter made all the mortgage payments. CRA accepted that daughter was the beneficial owner notwithstanding the absence of a nominee agreement or bare trustee declaration. See also Fourney and Peragine.
Neal Armstrong. Summary of 22 November 2013 T.I. 2013-0511771E5 under s. 104(1).
Angle Energy – Bellatrix merger contemplates unilateral s. 85 elections
Angle Energy shareholders have sold their share to Bellatrix for cash or Bellatrix shares (but with the overall cash/share split fixed at 22%/78%), followed by an amalgamation of Bellatrix, Angle and an Angle subsidiary (ARI). The first step under the plan of arrangement was the s. 98(3) winding-up of a partnership between Angle and ARI.
Angle shareholders who wish to elect under s. 85(1) or (2) will be able to download "pre-signed" election forms from the Bellatrix website. Presumably Bellatrix will have no way of monitoring whom it has "jointly" elected with, in which case it may not be able to correctly compute the cost of its Angle shares or the PUC limit for the shares issued by it.
Neal Armstrong. Summary of Joint Circular of Angle Energy and Bellatrix Exploration under Mergers & Acquisitions – Mergers – Shares for Shares or Cash.
CRA finds that the provision of paid support services by a charity to a joint venture corporation would be a bad business
A charitable corporation proposed that it and a taxable Canadian corporation would transfer assets including goodwill to a jointly owned CBCA corporation (Newco) in consideration for shares, with Newco apparently to carry on a business with the transferred assets and transferred employees. CRA ruled that the holding of this Newco investment and the performance of broad oversight would not in itself be a business which was not a related business (which would have been a bad thing). However, the Rulings Directorate consulted with the Charities Directorate who, among other concerns, considered that the provision of support services by the Charity to Newco (for fees equal to the greater of the services’ cost and fair market value) would be an unrelated business.
Neal Armstrong. Summary of 2012 Ruling 2011-0431051R3 under s. 149.1(2)(a).
Delavaco has decided to go public as a public company rather than a REIT or LP
Delavaco, which is a privately-held Ontario corporation holding US single-family rental homes through Delaware partnerships, will be going public by merging into a small capital pool company (Sereno) under a triangular amalgamation with a Sereno subsidiary, so that Delavaco shareholders will receive approximately 99% of the shares of Sereno (whose name will be changed to Delavaco Residential Properties Inc.)
This transaction represents a change of heart from May 2013, when Sereno and Delavaco entered into a letter of intent for the acquisition by Sereno of all the Delavaco shares pursuant to a plan of arrangement, and for Sereno’s subsequent conversion into a REIT.
It likely would be advantageous for the new public entity to be a flow-through entity for Canadian and US purposes if the US operations could also be held in a US private REIT (see American Hotel and Granite). However, such a structure might restrict options for disposing of the homes (and some have occurred already in Delavaco’s short life). A US private REIT is subject to a 100% tax on any net income derived from the sale or other disposition of "dealer property" (other than foreclosure property), i.e., real estate held by the taxpayer primarily for sale to customers in the ordinary course of business.
Neal Armstrong and Abe Leitner. Summary of Joint Delavaco and Sereno Circular under Mergers & Acquisitions – Amalgamations - Triangular Amalgamations.