News of Note
FAM REIT offering uses note and exchangeable units structure
Email this ContentHuntingdon is launching FAM REIT by transferring the initial properties to a subsidiary LP (FAM LP) in exchange for Class A and B units and a promissory note, and then selling the Class A units and the promissory note to the new REIT for a portion of the public offering proceeds. The retained Class B units then becoming exchangeable units; and the REIT converts the note into Class A units.
In light of a CRA position that a partner can have only one interest in a partnership, the purpose of the note appears to be to hive cost base away from the retained Class B units. This should work if the promissory note qualifies as debt rather than as part of Huntingdon's interest in FAM LP.
Neal Armstrong. Summary of FAM REIT preliminary prospectus under Domestic REIT Offerings.
Trident, a private company, effects a reverse takeover of Andor using a triangular amalgamation rather than a plan of arrangement
Although most public company mergers these days utilize plans of arrangments, uncooperative minority shareholders can also be carried along on the closing date by using a triangular amalgamation without a plan of arrangement (if there is no need to be exempted from US registration requirements by the 3(a)(10) rule). This is what is proposed in the proposed reverse takeover of Andor, a TSX-V listed micro-cap company, by Trident, a private company. This transaction effectively is a back-door listing of Trident (which is what Andor will be called after the amalgamation).
Neal Armstrong. Summary of Andor Circular under Mergers & Acquisitions - Triangular amalgamations.
CRA announces that it will put on hold any individual returns claiming gifting tax shelter credits
CRA has announced that any 2012 returns claiming credits from a gifting tax shelter will not be assessed until the shelter's audit is complete - which likely will not go well as "all gifting tax shelter schemes are audited and CRA has not found any that comply with Canadian tax laws."
Scott Armstrong. Summary of "The Canada Revenue Agency: protecting Canadians from gifting tax shelter schemes" CRA News Release, 30 October 2012 under s. 237.1(1) - tax shelter.
CRA finds that pre-acquisition-of-control net capital losses of a CCPC continue to grind its CDA
CRA has confirmed that net capital losses of a CCPC, which are extinguished for most purposes upon an acquisition of its control, nonetheless will continue to be deducted in computing its capital dividend account: the worst of both worlds.
Neal Armstrong. Summaries of 5 October 2012 APFF Roundtable, Q. 8, 2012-0454161C6 F under s. 89(1) - CDA, and s. 245(4).
CRA requires that a mortgage investment corporation not be involved in management activities of a subsidiary.
One of the requirements for a corporation to qualify as a mortgage investment corporation (MIC) is that its only undertaking be the investing of its funds and that it not manage or develop real property. CRA considers that this requirement will not be breached if the mooted MIC has a subsidiary which manages or develops real property, provided that the MIC is not involved in those activities of its subsidiary.
A similar issue which arise in the income fund world is often addressed in part by ensuring that there is no overlap between the trustees of the income fund and the directors of any subsidiary with an operating business.
Neal Armstrong. Summary of 12 October 2012 T.I. 2012-0450291E5 under s. 130.1(6).
CRA rules that Canadian Finco loans qualify as ordinary-course loans of a money-lending business
A grandchild Canadian subsidiary of a non-resident multinational will issue commercial paper and notes in the Canadian public markets and on-lend at a positive spread to non-resident affiliates which are not its foreign affiliates. CRA ruled that this "Canco" will qualify for the exception in s. 15(2.3) from the shareholder loan benefit rule, on the basis that these loans will be made in the ordinary course of Canco's (intra-group) money-lending business.
This is a better result than avoiding the shareholder loan rules by electing under the draft October 15, 2012 draft rules to have the inter-company loans be "pertinent loans or indebtedness." The required interest accrual on "PLOIs" is quite high (currently 5%) whereas the ruling refers to the interest rates charged by Canco being no less than the "ordinary" prescribed interest rate of 1%, which is not likely to be a constraint.
Neal Armstrong. Summaries of 2012 Ruling 2011-0417711R3 under s. 15(2.3) and s. 17(5) - Exempt loan or transfer.
CRA indicates that capital dividend elections must be made in any applicable elected functional currency
CRA is of the view that making a functional currency election does not preclude the electing Canadian corporation from using Canadian dollars (or some other currency which is not the elected functional currency) in its "shareholders'" resolutions (including, presumably, directors' resolutions). However, capital dividend elections (as well as the capital dividend account itself) must be maintained in the functional currency.
Neal Armstrong. Summary of 20 September 2012 Memorandum 2012-0453071I7 under s. 261(5)(a).
CRA switches to OECD method for apportioning employee stock option benefits
CRA has announced a change to its policy for determining what portion of a stock option benefit is attributable to Canada where the employee in question has worked both in Canada and abroad. Rather than apportioning on the basis of the relative days of Canadian employment in the year of grant, CRA will use the methodology in the OECD Commentary, which typically refers instead to the relative days of Canadian employment in the vesting period. This policy change is effective for stock options exercised after 2012.
However, any specific Treaty provisions to the contrary will prevail. For example, there is a somewhat different methodology under Annex B to the 5th Protocol to the Canada-U.S. Treaty, which is based on the relative employment days between grant and exercise, rather than just the vesting period (see 6 July 2012 Memorandum 2012-0440741I7 summarized under Treaties - Article 15).
Neal Armstrong. Summary of 25 September 2012 B.C. Canadian Tax Foundation Conference, Q. 17, 2012-0459411C6 under s. 115(1)(a)(i).
Income Tax Severed Letters 14 November 2012
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is available for your viewing.
CRA issues butterfly ruling letter respecting a foreign spin-off transaction
CRA has issued another ruling letter on a cross-border butterfly, in which a spin-off business is transferred from DC, which is a Canadian sub of a foreign public company (Foreign Pubco), to TC, which is a subsidiary of a non-resident subsidiary (Foreign Spinco Parent) of Foreign Pubco. Foreign Spinco Parent is then distributed as a dividend-in-kind to the public shareholders of Foreign Pubco.
Similarly to the ruling described in an October 28th post, there was a requirement that the equity of TC not represent 10% or more of the equity of ForeignSpinco Parent in order to stay on-side with s. 55(3.1)(b)(i).
Neal Armstrong. Summary of 2012 Ruling 2012-0439381R3 under s. 55(1) - distribution.