News of Note
Killam is converting to a REIT with a limited rollover option
Email this ContentKillam is proposing to effectively convert to a REIT (although, very unusually no statement is made that management actually expects it to qualify as a REIT). Most of its shareholders will exchange their shares for units of the REIT on a taxable basis. However, up to 20% of the shares may instead be exchanged on a s. 97(2) rollover basis for exchangeable units of a subsidiary LP into which Killam will be dropped, with the REIT backstopping the exchange obligations of the LP under an Exchange Agreement.
In order that the subsidiary LP will be an "excluded subsidiary" (i.e., within a safe harbour from the SIFT rules), those electing rollover treatment generally must be taxable Canadian corporations - so that individuals wishing to elect would need to transfer their shares first to a holding company. Killam will then be transferred to a Newco for consideration including an interest-bearing note, followed by their amalgamation, in order to shelter the rental income of the properties now held by Killam through a lower-tier LP.
Convertible debentures of Killam (bearing interest of around 5.5%) will simply be assumed by the REIT in consideration for the issuance of a note to it by Killam.
Neal Armstrong. Summary of Killam Properties Circular under Offerings - REIT and LP Offerings - Domestic REITs.
Tribute Pharmaceutical proposes an inversion transaction with Pozen resulting in both corporations becoming indirect wholly-owned subsidiaries of a new public Irish holding company
A Circular of Tribute Pharmaceuticals (a Canadian public company) dated November 6, 2015 describes a proposed inversion transaction with Pozen, a Delaware public company, which would result in both companies being held through an Irish holding company (Parent), with Pozen and Tribute shareholders holding approximately 63% and 37% of the shares of Parent, respectively, before giving effect to a subsequent financing. To achieve this structure, Pozen would cause Parent to be incorporated, "Ltd2" (an Irish private limited company) would be incorporated as a direct, wholly-owned subsidiary of Parent, and each of US Merger Sub and Can Merger Sub would be incorporated as sister corporations and subsequently transferred to become direct, wholly-owned subsidiaries of Ltd2. Can Merger Sub would acquire all of the outstanding common shares of Tribute under an OBCA arrangement in exchange for delivering Parent shares, and US Merger Sub would be merged with and into Pozen under a Delaware merger, with Pozen as the survivor.
The transaction (targeted to be completed by year-end) is conditional on an opinion from Pozen's special tax counsel to the effect that Code s. 7874, existing regulations promulgated thereunder, and official interpretation thereof should not apply so as to cause Parent to be treated as a U.S. corporation for Code purposes.
An Irish holding company also was used in the somewhat more intricate Endo/Paladin inversion transaction.
Neal Armstrong. Summary of Tribute Pharmaceuticals Circular under Other – Inversions.
Elim Housing Society – Tax Court of Canada finds that a nursing home for those with dementia qualified for the enhanced public service body HST rebate
Woods J found that a B.C. long-term care facility, whose residents mostly had dementia, severely impaired mobility, complex medical issues and a life expectancy of between three months and three years, was making "facility supplies," so that it was eligible for the enhanced 83% public service body HST rebate. This likely overrules 3 July 2012 Ruling 109082 (re a nursing home).
Although there were a number of significant and novel interpretive issues to resolve, the "gist of the dispute… [was] whether the services provided by care aides…, such as toileting and bathing, [were] therapeutic health care services." Woods J found that it was sufficient that these care aide services were provided at the direction of the on-site nurses "to address particular medical concerns."
Neal Armstrong. Summary of Elim Housing Society v. The Queen, 2015 TCC 282 under ETA s. 259(1) – facility operator.
Canada Life – Ontario Superior Court grants requested detailed rectification of an LP wind-up so as to avoid a s. 98(5) rollover
A Canada Life subsidiary (CLICC) clearly intended to realize an accrued loss on its LP interest in a subsidiary partnership by winding it up. CRA reassessed to deny the loss on the basis that the s. 98(5) rollover applied.
Pattillo J granted the requested order that the transactions be deemed to occur as requested by CLICC so that the rollover did not apply, notwithstanding a Crown complaint that the number of proposed rectification transactions was two more than had originally occurred. He noted that arguments that rectification was restricted to correcting mistakes in the instruments used to implement a definite and ascertainable tax plan had been rejected in Fairmont.
Neal Armstrong. Summary of Canada Life Insurance Co. of Canada v. A.G of Canada, 2015 ONSC 281, under General Concepts – Rectification.
CRA rules that legal fees incurred for the purpose of receiving compensation for lost business profits give rise to non-creditable GST
CRA has ruled that legal services provided to a business in successfully suing for lost business profits did not qualify as giving rise to an input tax credit for the HST on the resulting legal fees. CRA reasoned that the resulting settlement was merely "compensatory," so that the legal services were not received for the purpose of making taxable supplies for consideration, as required by ETA s. 141.01(2).
This may illustrate that (at least in CRA’s view) ETA s. 141.01(2), in this respect, is narrower than ITA s. 18(1)(a). Under the surrogatum principle, compensation for lost business profits itself has the character of business income, so that legal fees incurred to generate such compensation should be deductible under ss. 18(1)(a) and 9.
Neal Armstrong. Summary of 1 May 2015 Ruling 164658 under ETA s. 141.01(2).
CRA finds that the connection test in XXIX-A(3) of U.S. Treaty can be satisfied by funding interest to a non-qualifying U.S. parent, on a loan whose use had nothing to do with a connected Canadian business, out of the cash flows generated by that business
Para. XXIX-A(3) of the Canada-U.S. Treaty lets a U.S. resident which is not a qualifying person access Treaty benefits (e.g., no withholding on non-arm’s length interest) if it satisfies a three-prong active trade or business test. One of these tests (the "Connected Test") is that the item of income, for which the Treaty benefit is sought, is derived from the source state (Canada) in connection with or incidental to the (U.S.) actively-conducted trade or business of the U.S. person - including any such income derived directly or indirectly by that U.S. person through a person that is resident in Canada.
A U.S. person who was not a qualifying person (US-Holdco1) lent money to a direct or indirect Canadian subsidiary (Canco, carrying on a connected business) to help fund the purchase by Canco (through an intermediate structure) of a non-North American target. CRA considered that the Connected Test could be satisfied so as to permit the interest on the loan to enjoy the Treaty exemption, even though the lent money was not used in Canco's business, if the interest payments were funded out of the cash flow from that business. Conversely, if the interest payments to US-Holdco1 were partially funded from foreign affiliate dividends, no relief would be available under para. XXIX-A(3).
Neal Armstrong. Summary of 5 November 2015 Memo 2013-0496401I7 under Treaties - Art. 29A.
Income Tax Severed Letters 18 November 2015
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Finance releases pre-comfort letter on largely overriding s. 104(13.4)(b) and permitting limited backdating of post-mortem donations
The new s.104(13.4)(b) rule dealing with spousal trusts (and similar trusts such as alter ego trusts) deems the trust’s income for the year ending with the lifetime beneficiary’s death (including from deemed proceeds at death) to have been distributed to the lifetime beneficiary rather than to be retained as trust income. This can result in the associated income tax liability being borne by the wrong beneficiaries, and in the stranding of donation credits for post-mortem donations made by the trust (which no longer has any income to use the credits).
In response to these concerns, Finance has indicated that it is generally amenable to providing that s. 104(13.4)(b) no longer applies except, in limited circumstances, where the spousal (or other) trust, and the lifetime beneficiary’s estate, jointly elect into s. 104(13.4)(b) applying. To deal with the donation credit "stranding" issue, Finance is amenable to allowing the trust to backdate donations made by it in the calendar year of the death to the trust taxation year that was deemed by s. 104(13.4)(a) to end with the death.
However, Finance will think about "whether additional amendments may be necessary to give effect to the…policy objectives" of avoiding "unintended tax benefits."
Neal Armstrong. Summary of 16 November 2015 Letter of Brian Ernewein to Joint Committee, CALU and STEP Canada respecting s. 104(13.4) under s. 104(13.4)(b).
CRA will continue its favourable policy for allocation of charitable gifts between spouses after 2015
Notwithstanding some amendments to the charitable gift rules, CRA is continuing its administrative practice for spouses (or common law spouses) to allocate their charitable gifts between them in whatever manner they consider to be most advantageous.
Neal Armstrong. Summary of 30 September 2015 T.I. 2015-0590501E5 F under s. 118.1(1) – total charitable gifts.
CRA confirms that a graduated rate estate can have up to four taxation years
If the executors of an estate adopt a year end that results in an initial short taxation year (say, September 30, 2016, being six months after the death), then the estate generally would be deemed by s. 249(4.1) to have a further short taxation year, namely, its 4th taxation commencing on November 1, 2018 and ending on March 31, 2019, being 36 months after the death. Thereafter, the estate would not enjoy graduated rates and would be required to use a December 31 year end.
Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q. 1, 2015-0572131C6 under s. 249(4.1).