News of Note
Serabai Gold acquisition of Kenai Resources (holding CFAs) will use a Canadian Buyco
Email this ContentSerabi Gold, a UK public company, is proposing to acquire all the shares of Kenai Resources, a BC micro-cap company with a gold property held in a Brazilian subsidiary. The acquisition is proposed to occur under a three-way exchange pursuant to a plan of arrangement under which the Kenai shareholders will transfer their shares to a BC Newco subsidiary of Serabi (Subco), Serabi will issue ordinary shares to them, and Subco (which has one class of shares) will issue common shares with full stated capital to Serabi. Subco and Kenai will then amalgamate.
The normal PUC suppression rule in s. 212.3(7) applies to the PUC of the shares of the CRIC (i.e., Subco) "immediately before" the investment time, whereas here the Subco shares are to be issued immediately afterwards. A dividend substitution election may be planned (see IFA 2013 Round Table, Q. 6(h)), as the same timing rule is not stated to apply in that situation.
As noted in a previous post, CRIC vertical amalgamations are problematic, but presumably Finance will fix that.
Neal Armstrong. Summary of Kenai Resources Circular under Mergers and Acquisitions – Inbound – Other.
CRA extends Norco doctrine
A character preservation rule (s. 129(6)) provides that amounts such as rents and interest which are deducted in computing the Canadian active business income of a Canadian-controlled private corporation are deemed to be Canadian active business income of an asociated corporate recipient for purposes of various rules (in ss. 125 and 129) applicable to CCPCs. In Norco Development, McNair J found (somewhat contrary to the wording of ss. 96(1)(c) and(f)) that interest paid by a partnership to an associated corporation was within the character preservation rule.
CRA considers that the rule also applies in the reverse situation of payment of rent by a CCPC to a partnership to the extent of the percentage member interest therein of an associated CCPC.
Neal Armstrong. Summary of 10 May 2013 T.I. 2012-0442791E5 F under s. 129(6).
CRA confirms that Canadian partnerships generally are transparent for Treaty withholding-rate purposes
CRA considers that a partnership is fiscally transparent for Treaty withholding purposes, so that if a partnership with two Canadian corporate partners is deemed under the s. 15(2) upstairs loan rules to pay a dividend to the direct or indirect parent of the Canadian corporations, the Treaty-reduced rates of withholding for dividends paid to Treaty-resident affiliates satisfying the applicable voting control or share ownership tests generally will be available.
The Netherlands Treaty has a Treaty-reduced rate of 5% inter alia for situations in which the non-resident company "controls directly or indirectly at least 10 per cent of the voting power in" the Canadian payor, so that the 5% rate generally would apply to a deemed dividend received by a Netherlands "grandparent."
Neal Armstrong. Summary of 31 May 2013 T.I. 2013-0486011E5 under Treaties – Art. 10.
Income Tax Severed Letters 12 June 2013
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Tele-Mobile - Federal Court of Appeal finds that the mere "opportunity" of the customer to calculate the GST in a rebate is insufficient for the supplier to claim ITCs
A registrant who pays a rebate in respect of a taxable supply previously made by it in Canada generally is entitled to an input tax credit on the applicable fraction of the rebate provided that it "therewith provides a written indication that a portion of the rebate is an amount on account of tax" (s. 181.1(c)). Mainville JA stated that this requirement is not satisfied if the relevant document merely provides an unambiguous "opportunity" to calculate the GST component of the rebate (as had been suggested obiter by Campbell Miller J). Instead, an "actual written indication" specifying the tax or stating that the rebate includes the tax, is required.
Scott Armstrong. Summary of Tele-Mobile Company Partnership v. The Queen, 2013 FCA 149, under ETA ss. 181.1 and 181(1).
CRA notes that a s. 94 deemed-resident trust can access the general s. 164(6) carry-back rules
Although a non-resident estate cannot carry back, to the terminal return of the Canadian deceased, capital losses realized by it on shares of a Canadian corporation which are not taxable Canadian property, this is not a problem where the estate is deemed to be a resident trust under s. 94. Furthermore, the estate can also carry back a capital loss realized on the deceased's principal residence, assuming that it was not personal use property to any beneficiary.
Neal Armstrong. Summary of 12 February 2013 Memorandum 2012-0437211I7 F under s. 94(3)(a).
Aimia Loyalty - UK Supreme Court finds that paying for goods to be provided to a third party can generate VAT credits
The UK operator (LMUK) of a loyalty points programme was compensated by participating retailers for points which it awarded on sales to those retailers' customers, and then compensated other retailers ("redeemers") for goods or services which were acquired from them by the customers when redeeming points.
The UK Supreme Court found that the compensation payments made by LMUK to a redeemer were consideration for a supply of services by the redeemer to LMUK itself, rather than representing third-party consideration for a supply of goods or services by the redeemer to the customer who redeemed points - so that LMUK was entitled to the British equivalent of an input tax credit.
From a GST perspective, the case may be most relevant as an interesting application of the Redrow principle that a "supply of goods or services to the taxpayer...may...consist of the right to have goods delivered or services rendered to a third party." This judicial approach will sometimes supplement the definition of "recipient" in ETA s. 123(1), which provides that he/she who writes the cheque generally is the recipient of the supply.
Neal Armstrong. Summary of HMRC v. Aimia Loyalty UK Ltd, [2013] UKSC 15 under ETA s. 169(1).
CRA (sort of) extends the deadline for making a disproportionate UFT claim by one year
Where a "grandchild" foreign affiliate (FA2) pays a dividend out of taxable surplus to a "child" foreign affiliate (FA1) of Canco, a pro rata portion of the underlying foreign tax of FA2 in respect of Canco is levitated and becomes UFT of FA1. In addition, Canco can make a claim in a letter attached to its return to attach all (or any portion) of the remaining UFT of FA2 to the dividend. This permits Canco to defer tax on any subsequent dividend received by it from FA1 out of taxable surplus.
In 901185, CRA indicated that this disproportionate UFT claim "can" be made by Canco in its return for the year (Year 1) in which the dividend was received by FA1. CRA has now clarified that this disproportionate UFT claim can also be made by Canco in the immediately following year (Year 2) in which FA1 pays a dividend out of taxable surplus to Canco, provided that some additional conditions are satisfied - which typically will not be onerous for wholly-owned FAs having only one class of shares. This interpretation does not discuss the scenario where the subsequent dividend to Canco is not paid until Year 3.
Neal Armstrong. Summary of 3 April 2013 T.I. 2012-0460671E5 under Reg. 5907(1) – Underlying Foreign Tax Applicable.
CRA rules that a s. 87(4) rollover can give rise to a deemed dividend under the CRIC rules
The foreign affiliate dumping rules indicate that the amalgamated corporation resulting from a s. 87 amalgamation of related corporations generally is not considered on the amalgamation to have made an investment in foreign affiliate shares held by a predecessor. However, there is no rule deeming there to be no indirect investment in the shares of the foreign affiliate by a Canadian corporate shareholder as a result of such shareholder being deemed by s. 87(4) to have acquired its shares of the amalgamated corporation at the adjusted cost base of its shareholding of a predecessor. Furthermore, there is no rule to preclude multiple deemed dividends under s. 212.3(2) (or PUC suppressions under s. 212.3(7)) if there is a succession of amalgamations. See Example 18a-C.
CRA has ruled that two amalgamations of a Canadian Target - the first with a Canadian subsidiary of Target, and the second with the Canadian "Bidco" which acquired its shares and which was owned by a non-resident parent through an intermediate Canadian chain - gave rise to two deemed dividends if the foreign affiliates of Target exceeded the 75% valuation threshold set out in the indirect investment rule in s. 212.3(10)(f).
Neal Armstrong. Summaries of 2012 Ruling 2012-0451421R3 under ss. 212.3(18)(a) and 88(1)(d).
CRA acknowledges that partnerships are transparent for s. 116 purposes
CRA has found that where a partnership disposes of shares of a Canadian real estate company, none of the non-resident partners is taxable under the taxable Canadian property rules (and no s. 116 certificate is required). The reason is that s. 96(1), which effectively deems the shareholding to be taxable Canadian property to the partnership, does not apply for the purposes of the potential application of s. 2(3)(c) to its partners. Furthermore, given that CRA acknowledges that no partner (including a 99% partner) owns the partnership property, this result does not appear to rest on the size of the partnership interest of the non-resident.
CRA considers this result to be "unintended" and has advised Finance.
Neal Armstrong. Summary of 19 March 2013 Memorandum 2010-0385931I7 under s. 116(1).