News of Note
PGNX will use its PUC in advance of its final liquidation distribution
Email this ContentPGNX Capital Corp. has sold all its assets and has or will distribute the net proceeds in three tranches: a stated capital distribution on November 15, 2013; a distribution that will only partly be a stated capital distribution (as there is estimated to be insufficient remaining stated capital of all of it to be a capital distribution) on December 19, 2013; and a distribution pursuant to liquidation proceedings.
The tax disclosure indicates that even if a shareholder resolution is not passed to authorize the applicable portion of the second distribution to occur as a stated capital distribution, there may still only be a deemed dividend arising under s. 84(2) on the second distribution to the extent of the Corporation’s remaining paid-up capital.
Due bills attached to the PGNX shares would effectively mean that trades in the shares after the record date and before the payment time would entitle the purchaser to receive the second cash distribution.
Neal Armstrong. Summary of Circular of PGNX Capital Corp. under Spin-Offs and Distributions - Liquidations.
Testamentary trusts will be tainted if they become “beneficially interested” in an inter vivos trust
CRA has confirmed its position in 2011-0417391E5 F that any testamentary trust which becomes beneficially interested in a Quebec inter vivos trust (including it would appear by virtue of a mere potential to be named as a beneficiary by the trustees of the inter vivos trust from amongst a larger class of potential beneficiaries) will cease to qualify as a testamentary trust under s. 108(1) because the beneficial interest in the inter vivos trust represents property which has been contributed to it other than by testator as a consequence of the testator's death.
Neal Armstrong. Summary of 11 October 2013 APFF Round Table, Q. 5, 2013-0493671C6 F under s. 108(1) – testamentary trust.
Conocophillips - Federal Court finds that it rather than the Tax Court had the authority to reverse a CRA decision that the taxpayer’s objection was out of time
The taxpayer claimed that it did not find out about a notice of reassessment which allegedly had been mailed to it on November 7, 2008 (the "date of mailing" notation on the reassessment – although the reassessment was actually dated April 26, 2010!) until April 2010. The taxpayer promptly objected, and the CRA official rejected the objection on the basis that it was out of time.
Campbell J agreed with the taxpayer that the correct procedural remedy was for the taxpayer to apply to the Federal Court for an order to set aside the official’s decision to reject its objection (there was no indication that he had really reviewed the evidence that the reassessment had not been received) rather than to appeal to the Tax Court under s. 169(1)(b). That decision was set aside.
Neal Armstrong. Summary of Conocophillips Canada Resources Corp. v. MNR, 2013 FC 1192, under s. 169(1).
CRA found that an estate's holding of a debt claim to essentially all the NAV of an investment company was mostly irrelevant to de facto control
Although IT-64R4, para. 23 indicates that the holding of a large demand note is relevant to de facto control, CRA found in an internal technical interpretation (referenced, with a redacted document number, in a subsequent APFF Round Table) that this factor was "of little importance ... where the debt represented virtually all the net value of a corporation but all its assets consisted of readily marketable securities which could serve to repay the debt held by an estate without imperiling its investment operations."
Neal Armstrong. Summary of 11 October 2013 APFF Round Table, Q. 4, 2013-0493651C6 F under s. 256(5.1).
AES and Riopel – Supreme Court of Canada declines to reconcile the Juliar and Shafron lines of cases on rectification
In Riopel, a tax plan which contemplated a sale of shares followed first by an amalgamation, and then by the redemption of shares and repayment of a note by Amalco, was not properly implemented. Among other problems, the amalgamation occurred before any sale. LeBel J found that under art. 1425 of the Quebec Civil Code, the Court had the jurisdiction to declare that the written instruments did not give effect to the "the agreement of wills" reached by the parties when (before any documents were drafted) they were presented with the fully-articulated tax plan.
The simpler AES facts entailed a s. 86 exchange of shares for shares and a note, where the amount of the note was too high due to a miscalculation of the ACB of the old shares. LeBel J found that there was an agreement of wills for there to be a s. 86 rollover by taking back note only up to the ACB. Therefore, a declaration could be made under art. 1425 that the self-help documents which the parties entered into (after the filing of a notice of objection to the assessments of capital gain) - to reduce the note and issue (retroactively created) preferred shares - reflected that agreement.
The result in both cases is reasonably generous in the Quebec context as the articles of the corporations effectively were amended retroactively.
After referring to the argument of the Attorney General of Canada as intervener, that the Juliar line of cases was inconsistent with Shafron and Performance Industries, LeBel J stated (at para. 55) that the cases now before him were "governed by Quebec civil law and are not appropriate cases in which to reconsider the common law of rectification."
Neal Armstrong. Summary of Agence du Revenu du Québec v. Services Environmentaux AES Inc. and Agence du Revenu du Québec v. Riopel, 2013 SCC 65 under General Concepts - Rectification and Interpretation Act, s. 8.1.
2013 CTF Round Table
The questions posed to CRA at the Round Table held yesterday at the annual CTF conference, together with brief notes of the responses, are now available for your viewing. Some highlights:
- Q1. CRA has published its new practices on pre-ruling consultations.
- Q2(b). Where there is a mismatch in the loans amounts comprising a back-to-back loan to which s. 90(7) applies, the pay-down in the larger loan amount is treated as not going first to reduce the notional upstream loan.
- Q3. CRA will not follow the purported expansion in CAE of when the change-in-use rules apply, and will stick with IT-102R2 and IT-218R.
- Q4(c). Repetitive reporting on T1134s of tiered structures is no longer required.
- Q6. CRA accepts Daishowa.
- Q8. S. 214(7) deemed interest on a "regular" convertible debenture is not participating interest.
- Q11. CRA's policy of allowing 3-party agreements to get around s. 55(3.2)(h) in cross-border butterflies is now well-established.
- Q15. CRA did not accept using stock dividends to accomplish the approximate equivalent of a s. 85.1(3) drop-down.
- Q16(a). Will CRA incentivize its auditors by paying 25% of all reassessments?
Neal Armstrong and K.A. Siobhan Monaghan. 2013 CTF Round Table.
S. 69(11)(b) does not undercut the s. 85.1(3) rollover
Where Canco drops FA1 into FA2, prior to a sale of FA1 by FA2 to an arm’s length non-resident purchaser, s. 69(11)(b) will not apply to deny s. 85.1(3) rollover treatment on the drop-down transaction: FA2 is not "exempted" from tax under the Act on its sale of FA1, but simply is not subject to tax under the Act in the first place.
Neal Armstrong. Summary of 21 October 2013 Memorandum 2013-0505831I7 under s. 69(11).
Income Tax Severed Letters 27 November 2013
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The Canadian competent authority will apply pre-Fundy amorphous criteria in the context of reviewing a trust's residency under the Canada-US tie-breaker rule
The Fundy Settlement case established that the residence of a trust turns on where its central management and control is exercised. However, where a trust is resident both in Canada and the United States under each jurisdiction's general rules, the Canadian competent authority, in an endeavour to resolve the trust's residency under Art. IV (4) of the Canada-US Convention, will consider such factors as the residency of the settlor and beneficiaries, the location of the trust property, and the reason the trust was established in its jurisdiction. CRA also notes that Art. IV(4) only obliges the authorities to attempt rather than reach a resolution of the residency question.
As s. 4.3 of the Income Tax Conventions Act trumps the Convention, the Convention's tiebreaker rules cannot be applied where s. 94(3) deems a trust to be resident in Canada.
Neal Armstrong. Summary of 11 October 2013 APFF Round Table Q. 3, 2013-049281 F (Dual residency of a trust) under Treaties - Art. 4.
Global Cash Access - Federal Court of Appeal applies "commercial efficacy" (rather than Marxist labour theory of value) approach to find that mostly clerical services were a financial supply for GST purposes
Global Cash Access, which arranged for cash advances from credit card issuers to the patrons of casinos, paid a fee to the casino, which provided space for Global's terminals (which were used to approve the transactions) as well as preparing a sort of cheque that the patron cashed in at the casino cashier. Although from CRA perspective (which you might label as following Marx's labour theory of value), what the casino was mostly getting paid for was its clerical services and the provision of the space, Sharlow JA found that the "commercial efficacy" of the whole arrangement turned on the provision of the cash by the casino, so that the fee was consideration for a single supply of a financial service.
This same approach (that what was really being paid for was the "cheque" cashing function, even though that part of it was easy) also dictated a conclusion that the clerical/space provision aspects were not the "predominant" element of what was being supplied, so that the exclusions in paras. (r.4) and (r.5) of the financial services definition did not apply. This, in turn, suggests that these exclusions, which seemed like a big deal when they were introduced, may be benign.
Neal Armstrong. Summary of Global Cash Access (Canada) Inc. v. Canada, 2013 FCA 269, under ETA - s. 123(1) - "financial service."