News of Note
TransGlobe Apartment REIT privatization would occur as a sale and redemption transaction
Email this ContentThere is a proposed privatization of TransGlobe Apartment REIT. A portion of the REIT assets will be sold to members of the acquisition consortium, thereby triggering capital gains and recapture of depreciation. All of this income (plus additional income resulting from a loss of the REIT's usual capital cost allowance claims) will be pushed out to the public REIT unitholders in two ways: first, through a special cash distribution to them; and second, as a result of this increase in REIT income retroactively eliminating the tax-deferred percentage of monthly distributions previously paid by the REIT in 2012. The public's units then are redeemed in part out of cash unit subscription proceeds received from another consortium member.
Among many other interesting features, the retroactive decrease in the tax deferral percentages will retroactively increase the Part XIII tax applicable to the related distributions.
Neal Armstrong. See summary of 06 June 2012 Circular for privatization of TransGlobe Apartment REIT.
Clearwater Seafood - The public company successor of an income fund could not continue an existing income tax appeal
The Tax Court found that when the sub trust of an income fund was wound-up pursuant to s. 88.1(2) as part of a plan of arrangement for converting the income fund into a public corporation, the public corporation did not have the right to be named as the replacement appellant in a previously-launched appeal to the Tax Court - even though it had assumed all of the trust's liabilities. This raises a dilemma, as in order for roll-over treatment to apply, the trust must "cease to exist" immediately after the conversion.
The successor public company may face an assessment under s. 160(1). However, D'Arcy J. declined to decide that the sub trust had lost its standing to continue its appeal in light inter alia of the 460354 decision.
Scott Armstrong. See summary of Clearwater Seafood Holdings Trust v. The Queen, 2012 TCC 186 under s. 169(1).
CRA finds that post-judgment interest paid by the defaulting beneficial owners of a real estate project was non-deductible
CRA considered that post-judgment interest paid by two individuals on their guarantee of loans made to two nominee corporations who held a real estate project on their behalf was non-deductible because the judgment itself did not represent a borrowing by them.
This is questionable. Since they were the beneficial owners, they also were the true borrowers, and the post-judgment interest amounts could be considered to have been paid by them "pursuant to" their legal obligation to pay interest on their (initial) borrowings, which would not be extinguished until they paid the judgment.
The amount of the judgment was for the deficiency remaining after the creditors had realized on their mortgage by acquiring the properties. CRA accepted that but for the issue referred to above, s. 20.1 (which was enacted to overcome the "dispearing source" doctrine - see Emerson and Tennant) would have applied to deem the loans still to be used for an income-producing purpose following the seizure of the properties, assuming the seizure occurred after the effective date of s. 20.1.
Neal Armstrong. Summary of 12 March 2012 Memorandum 2011-0398721I7 under s. 20(1)(c).
CRA accepts that an interest in an LP engaged in an active business is investment property for butterfly purposes
The butterfly rules as administered by CRA require a pro-rata distribution of each of the three types of property. CRA recently accepted that the limited partnership interest of the distributing corporation (DC) in a limited partnership engaged in asset management was investment property rather than business property for these purposes, even though DC also partly owned the shares of the GP. This may reflect an approach of treating the LP effectively the same as a corporation over which DC did not exercise significant influence, rather than as equivalent to a joint venture or other direct conduct of the management business.
Neal Armstrong See summary of 2012 Ruling 2011-0413661R3 under s. 55(1) - "distribution".
Supreme Court grants leave to appeal in Daishowa
On the appeal to it in the Daishowa case, the Supreme Court will be faced with the issue as to whether and to what extent legal obligations of a purchaser to perform on-going work respecting a purchased asset (in that case, a reforestation obligation) will increase the seller's proceeds of disposition.
Scott Armstrong. See: the 5 June 2012 SCC Press Release; and the current summary of Federal Court of Appeal decision in Daishowa-Marubeni International Ltd. v. The Queen, 2011 FCA 267 under s. 13(21).
Spin-out of Brazilian subsidiary of CTF utilizing s. 86, and sale of CTF shares, under BC Plan of Arrangement
It is proposed that a Brazilian subsidiary (held through a Canadian holding company) be be spun out to shareholders of CTF Technologies Inc. (a BC company) followed by a sale of CTF by its shareholders to a Luxembourg subsidiary of FleetCor Technologies, a US public company. The spin-off will be accomplished by converting a portion of the shareholders' CTF shares into preferred shares having a paid-up capital (as determined up to one month after the spin-off) based on the estimated fair market value of the spun-off subsidiary. Both this spin-off transaction and the very detailed terms of the sales agreement are embedded in a BC Plan of Arrangement, with the resident shareholders potentially claiming a reserve under s. 40(1)(a)(iii) for deferred (and somewhat indeterminate) sales proceeds.
Neal Armstrong. See summary of 28 May 2012 Circular for BC Plan of Arrangement respecting CTF Technologies Inc..
Calgary v. Canada - Supreme Court decision may suggest that not all the recipients of an exempt supply are necessarily required to satisfy the conditions for exemption
Transit procurement funding received by the City of Calgary from the Alberta government did not detract from the related transit assets being provided by the City as part and parcel of its supply of exempt municipal transit services to the Calgary public. Although it was arguable that the Province was also the "recipient" of this single supply, that did not detract from it being an exempt supply, given that the wording of the exemption did not require that the traveling public be the exclusive recipients of the supply.
This suggests that an exempt supply (or, presumably, a zero-rated supply) potentially can have multiple "recipients" (generally, the persons liable to pay the consideration), not all of whom satisfy the conditions for exemption. For example, if it is agreed that the fee of a professional firm for services rendered to a non-resident bank will be borne in part by the Canadian borrower, this case would suggest that all of the fee is zero-rated.
Neal Armstrong. Summary of Calgary v. Canada, 2012 SCC 20 under s. 123(1) -"supply" and "recipient."
First Nationwide - Character of a distribution from a Cayman company's share premium account as a dividend governed its UK tax treatment
The English Court of Appeal found that the characterization under Cayman law of a distribution out of a Cayman company's share premium account as a dividend governed its characterization for UK taxation purposes. This issue is becoming less important from a Canadian income tax perspective as draft s. 90(2) will now deem most capital distributions from foreign affiliates to be dividends.
Neal Armstrong. Summary of Revenue and Customs Commissioners v. First Nationwide, [2012] BTC 99, [2012] EWCA Civ 278 under s. 90(1) and General Concepts - Substance.
Benedict - Tax Court confirms the taxpayer's ability to subsequently use non-discretionary deductions which he did not fully claim when they arose
Woods J. confirmed that where a deduction in computing income (in this case, the terminal loss deduction under s. 20(16)) is mandatory ("shall be deducted") rather than elective ("there may be deducted"), the taxpayer's failure to claim the full amount of the deduction in the year it otherwise arose does not stop him from including the unclaimed amount in non-capital losses deducted by him in subsequent years.
Scott Armstrong. Summary of Benedict v. The Queen, 2012 TCC 174 under s. 20(16).
Pure Multi-Family REIT LP offering will permit RRSPs and Canadian individuals to invest in US real estate with similar tax results to investing in a Canadian REIT
As described in a preliminary prospectus, it is proposed that a newly-formed Canadian-listed LP will invest in a newly-formed US private REIT. As this will be the only asset, there will be no SIFT tax, and a portion of the cross-border distributions will be received for Canadian purposes as return-of-capital distributions.
The US REIT is targeted to be exempt from US corporate tax; and its distributions that are paid out to qualifying Canadian residents are targeted to be eligible for Treaty-reduced rates, e.g., 0% for RRSPs and 15% for most Canadian individuals. Assuming appropriate foreign tax credits for the latter, this produces the same or similar results to their investing in a Canadian REIT. Sounds good.
Neal Armstrong. See summary of 18 May 2012 Prelim. Prosp. for IPO of Pure Multi-Family REIT LP.