News of Note
Any Spartan dissenters on Bonterra acquisition receive capital gains treatment
Email this ContentBonterra will acquire all the shares of Spartan under a share-for share exchange, resulting in potential rollover treatment under s. 85.1. This was considered to be a "Superior Proposal," so that Spartan has terminated its arrangement agreement with Pinecrest and paid a break fee of $12.5M to Pinecrest.
In order that dissenters will not get deemed dividend treatment, their Spartan shares are transferred to Bonterra under the Alberta Plan of Arrangement. The Arrangement Agreement, which is 86 pages before Appendices, reads like a full-blown bilateral share purchase agreement.
Neal Armstrong. Summary of Spartan/Bonterra Joint Circular under Mergers.
CRA rules that making loss-utilization loans did not change a corporation’s principal activities
CRA ruled that the making of intra-group loans in order to soak up unutilized non-capital losses and credits would not disqualify a corporation’s activities as being "primarily the carrying on… of a business that is a Canadian film or video production business." A similar point could arise under various principal business corporation definitions such as in s. 66(15) and Reg. 1100(12).
Neal Armstrong. Summary of 2012 Ruling 2012-0426581R3 under s. 111(1)(a).
Pacific Rubiales includes nominal cash in consideration for acquisition of C&C Energia in order to enhance bump
C&C Energia is spinning-off 95% of the shares of a newly-formed exploration subsidiary (Platino Energy), followed by an acquisition of all the C&C Energia shares by Pacific Rubiales in exchange for Pacific Rubiales shares (representing 7% of its shares in aggregate) and nominal cash consideration – so that no rollover treatment is available unless the C&C Energia shareholders make a joint s. 85 election with Pacific Rubiales. A likely reason for so limiting rollover treatment is enhancing the potential s. 88(1)(d) bump for capital property of C&C Energia.
Neal Armstrong. Summary of C&C Energia Circular under Mergers & Acquisitions – Mergers.
CRA confirms that valid price adjustment clauses also have retroactive effect for s. 75(2) purposes
CRA confirmed that a valid price adjustment clause for an estate freeze transaction generally will be considered to have retroactive effect for purposes of s. 75(2) (i.e., so that the freezor is not considered to have indirectly transferred property to the family trust as a result of the trust acquiring common shares at an undervalue) as well as for other income tax purposes provided that the clause is implemented.
CRA implicitly assumed that an adjustment to the freeze preferred shares would entail the corporation making or receiving an adjusting payment on those shares' redemption. This, in fact, is unlikely to be the case, as it generally would be preferable for the price adjustment clause to apply directly to the redemption amount of those shares - rather than keeping the redemption amount fixed and making adjustment payments.
Neal Armstrong. Summary of 5 October 2012 APFF Round Table, Q. 1 2012-0453891C6 F under General Concepts - Effective Date.
Income Tax Severed Letters 24 December 2012
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA will apply changes to the OECD Transfer Pricing Guidelines retroactively
CRA will apply the revised version of the OECD Transfer Pricing Guidelines to transactions which were completed, and treaties that were concluded, before its release on July 22, 2010 "since the revisions are [only] intended to increase clarity in the application of the arm’s length principle."
CN and Cameco offer 30-year notes
For those of you who are concerned that cross-border intra-group loans with a term of more than 10 years do not comply with the requirement under the transfer pricing rules for arm's length terms, you may be titillated to see that both CN and Cameco have issued 30-year notes: CN to US investors, and Cameco to Canadian investors. These notes have a yield that is approximately 100 or 134 basis points higher, respectively, than the 10-year notes concurrently being offered by CN and Cameco.
Neal Armstrong. Summaries of the offerings of 10- and 30-year notes under Prospectus Supplement for CN and Prospectus Supplement for Cameco under Offerings - Debentures.
CRA will not accommodate "as of" eligible dividend designations
Although an eligible dividend designation by a non-public corporation normally is required to be made at the time of the dividend payment, s. 89(14.1) now gives CRA the discretion to allow the designation to be made up to three years late where this is "just and equitable." Citing a desire to limit its administrative burden and to avoid eviscerating the legislative requirement of contemporaneous designations, CRA has stated that relief essentially will be limited to situations of honest and apparent mistake - for example, where subsidiaries of a public corporation (which were subject to tax at full corporate tax rates) failed to make timely designations. However, CRA will not accommodate taxpayers who purport to declare dividends "as of" a preceding year end, and need CRA to grant an "as of" eligible dividend designation.
Neal Armstrong. Summary of 29 May 2012 CTF Prairie Tax Conference 2012 Round Table Q. 18, 2012-0445661C6 under s. 89(14.1).
Trieste - Federal Court of Appeal confirms interpretation of habitual-abode tie-breaker test
The third "tie breaker" rule under the Canada-US treaty for determining an individual's residence refers to the individual's country of "habitual abode." Dawson JA found no palpable error in Lamarre J's finding that a U.S. citizen who spent only 69 days out of 623 in the US had his habitual abode in Canada. Following a review of the OECD commentaries and the Vienna Convention, Lamarre J in the Tax Court had concluded that the test of habitual abode in a jurisdiction turned on whether the individual "resided there habitually, in the sense that he regularly, customarily or usually lived [there]."
Scott Armstrong. Summary of Trieste v. The Queen, 2012 FCA 320, aff'g 2012 DTC 1125 [at 3133], 2012 TCC 91 under Treaties - Article IV.
Individual LLC members are in effect subject to 25% branch profits tax
Where a US LLC with qualifying US members carries on a branch business through a Canadian permanent establishment, CRA considers that the branch earnings are computed by the LLC, with the LLC paying the reduced rate of branch profits tax available under Art. X(6) of the Treaty (i.e., 5%, or nil if the $500,000 exemption has not been utilized) based on the share of the branch profits that are considered to be derived by its qualifying corporate members. Among other things, this means that the share of its branch profits that are considered to be derived by an individual member is subject to full (25%) branch profits tax - notwithstanding that the individual would not be subject to branch profits tax if he or she carried on the Canadian business directly.
Furthermore, the LLC is considered to have only one $500,000 cumulative exemption that must be shared among its corporate members (and associated companies).
Neal Armstrong. Summary of 23 October 2012 T.I. 2012-0440101E5 under Treaties - Art. 10.