News of Note
CRA countenances arrangements for reimbursement by subsidiary employers for the fair value of parent LTIP stock option grants as at the grant date
Email this ContentCRA historically has indicated that a "reimbursement" payment by a non-resident subsidiary to its Canadian parent for the difference between the fair market value of shares of the parent company on the date of exercise of options on the shares of the parent previously granted to employees of the subsidiary, and the exercise price, generally does not result in an inclusion in the income of the parent under s. 15(1), 12(1)(x) or 90 (see 9 October 2001 T.I. 2000-003491) - and conversely re s. 214(3)(a) in the non-resident parent/Canadian subsidiary employer situation (see 1999 Ruling 990259 for a variation on this).
CRA has now indicated that there will be no benefit (giving rise to Part XIII tax under s. 214(3)(a)) where the Canadian employer/subsidiary reimburses its non-resident parent for the fair value (as computed under IFRS-2) of employee stock option grants at the date of the option grant. It seems to be implicit in this that the Canadian sub would not be expected to make a further reimbursement payment on option exercise.
Neal Armstrong. Summary of 29 April 2013 T.I. 2010-035640 under s. 15(1).
Income Tax Severed Letters 29 May 2013
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Loblaws is spinning off 75% of its real estate into Choice Properties REIT
Loblaws is proposing to transfer 75% of its Canadian real estate, with a value of $7.3 billion, to a subsidiary LP of a new REIT (Choice Properties REIT). However, only about $600 million of units with a yield of around 6.5% are being issued to the (mostly-Canadian) public, so that, initially at least, loss to the fisc will be modest even if there are a significant number of RRSP purchasers. (No estimate of the tax deferred percentage is given.) Loblaw will get most of the $600 million unit offering plus all of the $600 million to be raised under a separate public debenture offering by the REIT.
In addition to the usual use of the issuance of exchangeable Class B units of the subsidiary partnership to Loblaw subsidiaries, they also are taking back Class C preferred units with a fixed return (perhaps in order to service retained debt, somewhat similarly to Melcor). Unusually, the holders of the Class B exchangeable units are entitled to participate in a DRIP for their Class B units (with a 3% bonus unit feature, and a right to be paid distributions in REIT units rather than Class B units), to mirror a DRIP at the REIT level.
Neal Armstrong. Summary of Choice Properties REIT preliminary prospectus under Offerings - REIT and LP Offerings - Domestic REITs.
CRA finds that a foreign demerger transaction does not give rise to a shareholder benefit
CRA has concluded that a foreign demerger transaction under which part of the assets of FA1 are transferred to FA2 (in the same jurisdiction) for no consideration, with FA2 issuing shares to the Canadian parent with a foreign paid-up capital equal to the book value of the assets which are transferred to it, and with a corresponding reduction in the foreign paid-up capital of the shares of FA1, qualifies as giving rise to a deemed dividend under draft s. 90(2), so that there is no taxable shareholder benefit to the Canadian parent. Similar considerations arise if FA1 and FA2 are held through an intermediate foreign holding company.
An example of this type of demerger transaction is a German sideways spin reorganization.
Neal Armstrong. Summary of 23 May 2013 IFA Round Table, Q. 2 under s. 90(2).
CRA indicates that share redemptions can qualify as PUC distributions under the PUC reinstatement rule in the foreign affiliate dumping rules
CRA has indicated that a share redemption by a CRIC (or qualifying substitute corporation) will be considered to be a distribution or reduction of paid-up capital by the CRIC for purposes of the PUC reinstatement rule in s. 212.3(9)(c). However, it often will be preferable for the CRIC to effect a distribution of the subject shares or proceeds, rather than using such property to redeem its shares, given that only part of a PUC increase under s. 212.3(9) may reduce the deemed dividend arising on a share redemption. See Example 9-A.
Neal Armstrong. Summary of 23 May 2013 IFA Round Table, Q. 6(b) under s. 212.3(9).
CRA indicates that a dividend substitution election does not require a QSC
CRA has indicated that a s. 212.3(3) dividend substitution election can be made by a corporation resident in Canada (CRIC) under the foreign affiliate dumping rules even if there is no qualifying substitute corporation in the group. This means that even in these circumstances, the election may be used to determine which non-resident corporation received the s. 212.3(2) dividend from the CRIC, or which class of shares such dividend was paid on; and also can avoid a requirement to trace PUC to the non-resident investment. See Example 3-B.
Neal Armstrong. Summary of 23 May 2013 IFA Round Table, Q. 6(h) under s. 212.3(3).
2013 IFA Round Table
We are providing a summary of the CRA responses to questions posed to them at the 2013 IFA conference
We caution that we had difficulty making out some of the responses. CRA stated that it would be providing its full written comments in about three weeks' time.
Daishowa - Supreme Court finds that assuming an obligation on a property is not consideration if the obligation is "embedded" in the property
The taxpayer held forest tenures, which under Alberta law were subject to reforestation obligations. When the taxpayer sold the tenures and transferred the reforestation obligations, the Minister included the purchaser's assumption of those obligations in the taxpayer's proceeds of disposition - essentially treating the assumption of reforestation obligations in the same way as an assumption of a mortgage encumbrance.
The Supreme Court found that the reforestation obligations were embedded in the forest tenures, given that Alberta's statutory regime made it impossible to transfer the forest tenures without the reforestation obligations, or vice-versa. Therefore, the reforestation obligations were an intrinsic factor that reduced the purchase value of the tenures rather than a "distinct existing liability" that a purchaser could assume as part of the consideration it paid - i.e. more like anticipated future repairs on a property rather than a mortgage encumbrance.
Scott Armstrong. Summary of Daishowa-Marubeni International Ltd. v. The Queen, 2013 SCC 29, under s. 13(21).
Income Tax Severed Letters 22 May 2013
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A functional currency conversion of a Canadian taxpayer to the U.S. dollar and then back again generally will change the amount of its non-capital losses
A taxpayer elected to have the U.S. dollar as its functional currency for its 2009 calendar taxation year and revoked that election for its 2011 taxation year. The U.S. dollar appreciated from 1.1 loonies on December 31, 2008 to 1.2 loonies on December 31, 2010.
If you applied common sense and expected that a non-capital loss of Cdn. $1,200 incurred by the taxpayer in 2008 would still be a non-capital loss of that amount (if not already utilized) when the taxpayer converted back to Canadian dollars, you would be wrong. Due to the appreciation of the U.S. dollar, that non-capital loss would now be Cdn. $1,309.
Neal Armstrong. Summaries of 13 February 2013 2011-0430921E5 F under ss. 262(12) and 261(15).