News of Note
Horizons Leveraged Commodity ETFs will replace share sale forwards with cash-settled forwards in response to Budget character conversion rules
Email this ContentThe Horizons Leveraged Commodity ETFs have made s. 39(4) elections and entered into forward sales of their Canadian portfolio share investments to a Canadian bank at prices which are tied to the performance of notional long or short rolling futures positions in the underlying commodity rather than on the value of the shares, thereby achieving capital gains treatment. The March 2013 federal budget provided that this type of "derivative forward agreement" will now give rise to income account gains, subject to transitional relief (with modest additional transitional relief announced on July 11, 2013).
After running through the applicable transitional periods, the ETFs will now replace the existing forward contracts with cash-settled forward contracts, and will use any new unit issuance proceeds to invest in cash equivalents (to be pledged under the cash-settled forwards) rather than in Canadian equities.
Any gains on the new contracts will be on income account. This may not be a concern to taxable investors (who for other reasons are encouraged to trade rather than invest in their units) if they do not hold units on the record date for any distribution of any net annual gains.
Neal Armstrong. Summary of Prospectus for Leveraged Horizons Commodity ETFs under Forward Sale Funds.
Disaster relief payments from an employer are not income
An employer proposed to match donations from its employees to any of its employees affected by the Calgary floods, to be distributed on the basis of need and magnitude of damage. CRA stated that such payments would not be subject to income tax provided that "the individual received the Payment in his or her capacity as an individual, as opposed to his or her capacity as an employee." For the payments to be tax-free, they must be philanthropic in purpose and their quantum must not relate at all to the individual's performance or pay grade.
Scott Armstrong. Summary of 12 July 2013 T.I. 2013-0496281E5 under s. 6(1)(a).
Income Tax Severed Letters 17 July 2013
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Threshold Power Trust extends the cross-border income fund model to wind projects
Threshold Power Trust will indirectly acquire the interests of US tax shelter investors in US LLCs generating electricity from wind through a structure similar to that used by Argent Energy Trust to invest in a U.S. oil and gas business: it will hold the underlying project LLCs (and Delaware LLPs) through a subsidiary Ontario trust on top of a Canadian holding company on top of a US C-Corp. holding company, with interest paid at 7.5% on a note owing directly by the C-Corp. to it.
Although no view is expressed on whether the foreign accrual property income rules will apply (which is relevant for surplus purposes even if the underlying project LLCs are not considered to be controlled foreign affiliates), presumably the position will be taken that producing and selling electricity does not generate income from property.
The U.S. inversion rules are not expected to apply to the Trust since none of the vendors of the project LLC interests will receive Trust units in consideration for the sale nor will their continuing interests in the project LLCs have dividend, redemption or liquidation rights that are substantially similar to the rights of a holder of Trust units.
Neal Armstrong and Abe Leitner. Summary of Preliminary prospectus for IPO of Threshold Power Trust under Foreign Asset Income Funds and LPs.
Capital BLF Inc. provides meager rollover option on REIT conversion transaction
Capital BLF Inc., a small public real estate company, is converting into a REIT under a CBCA plan of arrangement. Qualifying shareholders are given the option of transferring their shares on a rollover basis for exchangeable units of a subsidiary LP rather than on a taxable basis for REIT units. Individuals do not so qualify, as the subsidiary LP must be an "excluded subsidiary entity" for SIFT purposes.
No tax disclosure is provided to those choosing the rollover option, perhaps reflecting uncertainty on the scope of the new character conversion (or synthetic disposition) rules.
Neal Armstrong. Summary of Capital BLF Inc. Circular under CPC Conversion.
Choice Properties REIT offering will segregate partner debt in a separate trust
Although at common law it may not be possible for a partner to also be a partnership lender (so that such debt effectively is recharacterized as partnership equity), CRA on one occasion considered that this potential recharacterization may be overridden in Ontario under the Limited Partnerships Act (Ontario) (see 17 March 2003 T.I. 2001-009567).
When the prospectus for the Choice Properties REIT offering (discussed in a previous post) was finalized, two preliminary steps were added so that $2 billion of notes owing by the master subsidiary Ontario LP will be held by an intermediate subsidiary unit trust rather than directly by the Loblaw-group limited partners.
Neal Armstrong. Summary of Choice Properties REIT prospectus under Offerings - REIT and LP Offerings - Domestic REITs.
CRA (reluctantly?) confirms that a subsidiary LP is transparent for purposes of the closed-end fund rules
A listed open-end mutual fund trust is converting to a closed-end (s. 108(2)(b)) fund in order that it can issue non-retractable preferred units to the public.
Notes owing to the fund by a subsidiary trust holding an office tower would exceed the 10% debt limit in s. 108(2)(b)(v). Accordingly, the office tower will be acquired, and the notes assumed, by a subsidiary LP, with the notes then being converted to partnership equity.
CRA gave opinions (rather than rulings – perhaps suggesting queasiness) that the subsidiary LP (whose units would be problematic if treated as securities or non-marketable securities in their own right) would be viewed as a look-through for purposes of the closed-end numerical tests – so that the fix described above "works."
Neal Armstrong. Summaries of 2012 Ruling 2011-0410181R3 under ss. 108(2)(b), 104(7.1) and 248(1) - disposition. See also 17 March 2003 T.I. 2001-009567.
LLCs owned by US-resident individuals are not entitled to the 5% branch profits rate
CRA also has published its response at the 2010 annual CTF conference indicating that the branch tax reduction under X(6) of the Canada-US Tax Convention is not available to an LLC that is wholly-owned by US-resident individuals.
Neal Armstrong. Summary of 28 November 2010 Annual CTF Round Table, Q. 17, 2010-0386391C6 under Treaties – Art. 10 (see also summary of 23 October 2012 T.I. 2012-0440101E5).
CRA publishes its position on tracing interest payments, made to a non-qualifying US parent, to earnings of a connected business
Interest paid by Canco to its US parent (USco) will qualify for Treaty benefits (i.e., no withholding tax), even if USco is not a qualifying person, if that interest is derived by USco "in connection with or incidental to" a (non-investment management) trade or business of USco that is "substantial in relation to the activity carried on in [Canada] giving rise to that income." CRA has published its response at the 2010 annual Canadian Tax Foundation conference indicating that, in the scenario where the cross-border debt was incurred by Canco to fund both a connected and non-connected business, Canco will be required to establish that the interest payments are funded out of the earnings of the connected business in order to avoid withholding.
Neal Armstrong. Summary of 28 November 2010 Annual CTF Round Table, Q. 12, 2010-0387001C6 under Treaties – Art. XXIX A.
Income Tax Severed Letters 10 July 2013
This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.