News of Note
CRA treats management fees paid by a non-profit organization as disguised profit distributions
Email this ContentCRA found that a non-profit organization, which had made a significant investment in a taxable corporation and which paid substantial management fees to its non-profit sole member corporation, was almost certainly ineligible for the s. 149(1)(l) exemption. The management fees, which were well in excess of any management costs of the sole member, were treated effectively as profit distributions for the benefit of the member - and it was irrelevant that the member itself was an NPO.
CRA's conclusion is consistent with other recent positions it has taken pursuant to its "NPO project," which are based inter alia on CRA's position that Woodward's establishes that "if the objectives of the organization cannot be achieved without the making of a profit, then the organization must be organized and operated for the purpose of profit."
Scott Armstrong. Summary of 21 November 2012 Memorandum 2012-055501I7 under s. 149(1)(l).
Income Tax Severed Letters 2 January 2013
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Any Spartan dissenters on Bonterra acquisition receive capital gains treatment
Bonterra 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).