News of Note
CRA rules that the unwinding of a sandwich structure avoids the application of the upstream loan rule
Email this ContentA US marketing subsidiary (US Salesco) has lent to an indirect Canadian parent (Can Opco 1) which, in turn, is ultimately indirectly owned by a non-resident parent. Can Opco 1 repays this payable, the sandwich structure is unwound (so that US Salesco now is a "sister" rather than indirect sub of Can Opco 1), and US Salesco then relends the same amount back to Can Opco 1.
CRA ruled that this avoids the application of the upstream loan rule in s. 90(6). It also ruled on routine applications of the reorganization exemption rules in s. 212.3(18) to the "de-sandwiching" transactions, including a mildly interesting illustration of the dovetailing of those rules with the partnership look-through rule in s. 212.3(25).
Neal Armstrong. Summary of 2013 Ruling 2013-0491061R3 under s. 90(8)(a).
CRA confirms that a holding company investment may satisfy the exemption from the FAD rules for closely-connected business investments
An investment made by a "CRIC" (a Canadian corporation controlled by a non-resident parent) in a US subsidiary (viewed as a "subject corporation") will not engage the deemed dividend rule in s. 212.3(2) if that investment satisfies the exeception in s. 212.3(16), including a requirement that the "business activities caried on by the subject corporation and all other corporations…in which the subject corporation has ... an equity percentage ... are ... on a collective basis, more closely connected to the business activities carried on in Canada ... than to the business activities carried on by any [specified] non-resident corporation...."
CRA has confirmed that this more-closely-connected test can be satisfied where the subject corporation (US Holdco) itself is a passive holding company, so that all the closely-related US business activities are carried on by subsidiaries of US Holdco.
Neal Armstrong. Summary of 6 September 2013 T.I. 2013-0474671E5 under s. 212.3(16)(a).
Income Tax Severed Letters 18 September 2013
This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that most insurance premiums and municipal taxes incurred during a rental building renovation are deductible
CRA found, in the situation where a taxpayer renovated a rental property, that: s. 18(3.1) only required the capitalization of insurance premiums that related to any risk connected to the renovation (suggesting that most of the premiums would be deductible), and; municipal taxes incurred during the renovation period were only required to be capitalized to the extent they related to the relevant land, rather than to the building (which, although not so stated by CRA, typically would represent a large part of the property’s value).
Neal Armstrong. Summary of 5 July 2013 2013-0489821I7 F under s. 18(3.1).
Canadian Tire REIT will be a closed-end fund
The new Canadian Tire REIT (called CT REIT) will be a closed-end (s. 108(2)(b)) rather than an open-end (s. 108(2)(a)) fund in order to accommodate the potential future issuance of preferred units.
Similarly to Melcor and Choice Properties (the Loblaw REIT), Canadian Tire will have a substantial (i.e., $1.8 billion) holding of Class C LP units (effectively like cumulative preferred shares) in the subsidiary real estate limited partnership of the REIT (presumably in order to service debt retained by Canadian Tire) along with around $900 million of exchangeable units of that LP, and around $600 million of units directly in the REIT. As only around $265 million is being raised on the IPO, the REIT will be substantially owned, directly or through the subsidiary LP, by Canadian Tire.
Also similarly to Choice Properties, the appropriate position also likely is implicitly being taken that the new character conversion rules do not apply to the exchangeable LP units.
Notes will be issued as part consideration for the transfer of the properties to the LP, before being immediately converted into LP units. This pseudo note consideration has the effect of guaranteeing a minimum cost to the LP for those properties.
Neal Armstrong. Summary of Preliminary Prospectus for CT REIT under Offerings – REIT and LP Offerings – Domestic REITs.
CRA accepts that the FMV of a professional partnership interest can be discounted for some portion of the deferred income tax on the work-in-progress?
An interest in a professional partnership, which had elected to exclude work-in-progress from income, is transferred on a rollover basis. Should the valuation of that interest be reduced for the deferred income tax liability on the work-in-progress?
CRA acknowledged that a potential purchaser likely would discount for such taxes, while at the same time noting its "general" position that "deferred taxes respecting a property which is the subject of a rollover should not be considered for the purposes of determining the FMV of such property."
Neal Armstrong. Summary of 13 August 2013 T.I. 2012-0471401E5 F under General Concepts – FMV – Other.
There is an automatic cost bump on the sale of corporate property at an undervalue to a controlling shareholder?
Although s. 69(1)(b)(i) is widely viewed as producing a one-sided adjustment (i.e., no increase in cost to the non-arm’s length purchaser to match the increased proceeds to the vendor), this effectively is not the case where an estate sells trust property to a beneficiary at an under-value (apparently without a price adjustment clause), as the resulting taxable benefit will increase the beneficiary’s cost under s. 52(1). Although not mentioned by CRA, the same logic appears to apply on a sale of corporate property to a non-arm's length shareholder.
This still is a bad result, as the under-valuation amount is taxable immediately on income account.
Neal Armstrong. Summary of 6 August 2013 T.I. 2012-0469481E5 F under s. 52(1).
CRA finds that the non-qualifying security rule in s. 118.1(13) effectively amends the wording of s. 70(5)
S. 118.1(5) deems a gift made under a will to be made in the deceased’s terminal year, so that the executor can then designate under s. 118.1(6) an amount (generally between the gifted property's adjusted cost base and fair market value) at which the property is deemed to be disposed of at the end of the terminal year. However, s. 118.1(13) provides that where the gift was of non-qualifying securities (other than an excepted gift), there is deemed to have been no gift except for purposes of determining the securities' proceeds of disposition under s. 118.1(6). This means that they are deemed to have been disposed of immediately before death under s. 70(5) rather than under s. 118.1(5). However, s. 70(5) deems the securities to be disposed of for their fair market value rather than an ACB designation under s. 118.1(6).
CRA's solution to this dilemma: the non-qualifying securities are deemed to be disposed of immediately before death under s. 70(5) for the amount designated under s. 118.1(6).
Neal Armstrong. Summary of 15 July 2013 T.I. 2013-0486701E5 under s. 118.1(13).
There’s no requirement to file an amended s. 85(1) election if you breach the PUC limit in s. 85(2.1)
The Rulings Directorate has confirmed that, where shares were issued by a Canadian corporation to its shareholders including a non-resident corporation on a contribution of property for which a s. 85(1) election was filed, there was an automatic downward adjustment under s. 85(2.1) to the paid-up capital of such shares if their stated capital exceeded the limit in s. 85(2.1). CRA initially had considered instead that this downward adjustment could not take place because it was too late to file an amended s. 85(1) election form – so that a deemed dividend arose to the non-resident under s. 84(1).
Neal Armstrong. Summary of 17 June 2013 Memorandum 2013-0475621I7 under s. 85(2.1).
Income Tax Severed Letters 11 September 2013
This morning's release of 25 severed letters from the Income Tax Rulings Directorate is now available for your viewing.