News of Note
Intergeo (a Russian-controlled sub) is proposing a reverse takeover of Mercator (a CRIC) utilizing restricted board nominations rights and with puts being issued to the Mercator shareholders
Email this ContentIntergeo (a BVI subsidiary of Daselina, which is a BVI holding company of a Russian billionaire) which unsuccessfully attempted to go public two years ago, is now proposing effectively the same thing through a reverse (share-for-share exchange) takeover of TSX-listed Mercator, so that Daselina will own approximately 85% of the post-reorganization Mercator, which in turn will own Intergeo. The current Mercator shareholders might demur at minority status in a Russian subsidiary. Accordingly, they are to receive (under s. 86) a right to put their common shares to Mercator for $5 per share during an exercise window of 18 to 30 months following the arrangement's effective date, with $31.7M placed in escrow as security.
Mercator currently has paid-up capital of $400 million, so that even if the foreign affiliate dumping rules apply to Mercator’s investment in Intergeo (and to a Daselina-funded injection of working capital in existing foreign affiliates), Daselina, through PUC averaging, will end up holding common shares with full PUC. However, the effect of Special Shares to be issued to each of Daselina and a BVI mystery company (Kirkland), is that Daselina and Kirkland will have the right to nominate only three of the nine Mercator board members (but with the other six being nominated by the board itself) – but they also will have veto rights on major decisions. These shares might result in Daselina not controlling Mercator so as to insulate against application of the FAD rules. See s. 212.3 - Example 1-E.
Appendix T of the Circular explains that "taxpayers and the Russian tax authorities often interpret tax laws differently."
Neal Armstrong. Summary of Mercator Circular under Mergers & Acquisitions - Cross-Border Acquisitions - Inbound - Reverse takeovers.
CRA will not provide voluntary disclosure relief from interest if the taxpayer has been insufficiently naughty
In IC 00-1R3, CRA stipulates that "a [voluntary] disclosure must involve the application, or potential application of a penalty." Esmail Bharwani asserts that "many accountants complain that CRA has decided in many of the cases that they would not have applied a gross negligence penalty, therefore the non-filer taxpayer would not qualify. So what was supposed to have been a VD request with possible waived penalties and cancelled partial interest arrears has now become subject to regular filing, with penalties and interest."
Neal Armstrong. Summary of Esmail Bharwani, "Voluntary Disclosures", CGA Magazine, March – April, 2014, p. 48 under s. 220(3.1).
Vine Estate – Tax Court of Canada finds that filing an amended return will not solve the statute-barring problem for the poorly-reviewed original return
Campbell J found that quickly filing an amended return, which corrects an error in a return which the taxpayer did not properly review, will not prevent CRA from reassessing the taxpayer after the normal reassessment period. This issue arose because CRA did not process the correction until after that period had passed and failed to get a waiver for the particular error-related issue.
A practice point: this case suggests that if a client carefully reviews a return but does not spot anything odd that merits following-up with her "expert" accountant, the return will become statute barred in due course even if the error would have been obvious to a properly-briefed expert. Therefore, insist that your client read it!
Neal Armstrong. Summaries of Vine Estate v. The Queen, 2014 TCC 64 under s. 152(4)(a)(i) and General Concepts - Evidence and Fair Market Value - Land.
CRA is reassessing Deans Knight for avoiding the loss-streaming rules
CRA is proposing to reassess Deans Knight for $22.7M by denying use of pre-2009 tax losses (mostly SR&ED credits and deductions to be more precise) which Deans Knight deducted from the profits of its new business as a bond investor. CRA is alleging that there was an acquisition of control in 2009, or that GAAR should be applied.
In 2008 and 2009, all of the (publicly-listed) shares in the capital of Deans Knight, and all of its assets, were transferred to a new holding company (Forbes), and it issued a debenture for $3 million to a private company (Matco) which was mostly convertible into non-voting rather than voting shares, presumably to avoid a control change. It then issued $100M of voting common shares under a public offering (now representing most of its shares), with the proceeds used in its newly-established bond business. The existing shareholders at the time of the IPO (Matco and Forbes) effectively received part payment for the tax losses through dilution of the new investors.
Deans Knight now is distributing all its assets as a stated capital distribution other than the tax reassessment amount and $1.2 million to pursue a tax appeal. Minor changes to the 2009 reorganization would have complied with the additional technical requirements of new draft s. 256.1 (re 75% FMV deemed control blocks), so that any resulting Tax Court decision likely would be of current interest.
Neal Armstrong. Summaries of Deans Knight Circular for winding-up distribution under Spin-Offs & Distributions – Liquidations and of Arrangement Circular of Forbes Medi-Tech Inc. and Prospectus of Deans Knight under Other – Loss Utilization.
CRA clarifies that a qualifying s. 94(2)(t) sale of Canadian shares effects an immediate change in trust residency
If a non-resident trust is "tainted" as a resident trust under s. 94(2)(g) by being issued shares by a resident corporation, it potentially can re-acquire non-residency status under s. 94(2)(t) if it makes a qualifying sale of the shares. When this occurs, it changes its status immediately, so that it is non-resident for the stub period beginning with the sale, is resident for the stub period before the sale, and has a potential deemed disposition of its property under the emigration rule (s. 128.1(4)) as a result of the status change.
Although all this is clear enough after plowing through the provisions, the wording of the Finance Explanatory Notes is confusing – so that effectively CRA has issued an interpretation of the latter.
Neal Armstrong. Summary of 24 February 2014 T.I. 2013-0509111E5 under s. 94(2)(t).
Income Tax Severed Letters 12 March 2014
This morning's release of 13 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA to date apparently has not been applying the GST GAAR provision
Wilson & Partners made an Access to Information request for all records pertaining to CRA’s interpretation of the ETA general anti-avoidance rule provision (s. 274). Although what they got back was heavily redacted, the relative thinness of the resulting points of interest is not inconsistent with a notion that to date CRA ultimately has been diffident in applying GAAR in a GST context. (So far there are no Tax Court s. 274 cases.)
Neal Armstrong. Summary of Brent F. Murray, "The General Anti-Avoidance Rule: CRA Discussions on GST Matters", CCH Tax Topics, No. 2191, March 6, 2014, p. 1 under ETA - s. 274(4).
The proposed main purpose test in the anti-Treaty-Shopping rule will not work well
The Budget 2014 anti-Treaty-shopping proposals include a main purpose test which is similar to the limitations-on-benefits provisions contained in the new Canada-Hong Kong Treaty. As pointed out by Jim Wilson (who was over 30 years with CRA), a literal application of this purpose test would result in all sorts of benign transactions being denied treaty benefits. For example, an LOB provisions would apply where a Caymans company transfers Canco to a Hong Kong holding company in order to access the Treaty-reduced dividend withholding rate, even if the Caymans company is owned by a Hong Kong-resident individual.
Neal Armstrong. Summary of Jim Wilson, "New Limitation on Benefits Provisions in Canada's Tax Treaties – A Step Too Far?", Gowlings Knowledge Centre, July 2013 under Treaties, Art. 29A (see also Steve Suarez, "Canada to Unilaterally Override Tax Treaties with Proposed New Anti-Treaty-Shopping Rule," Tax Notes International, 3 March 2014, 797-806, also under Art. 29A.)
Tax advisers are legally responsible for identifying tax savings
A UK NGO, the Tax Justice Network, published a legal opinion last September of Farrer that UK company directors do not have a fiduciary duty to their shareholders to avoid tax. The opinion notes that this "is in direct contrast to the position of a professional tax adviser who is potentially liable in negligence for such avoidable tax as may arise."
Neal Armstrong. Summary of Thomas E. McDonnell, "Tax Avoidance, Morality, and Professional Responsibility", Tax for the Owner-Manager, Volume 14, Number 1, January 2014, p. 5 under General Concepts - Negligence and Fiduciary Duty.
Secret Hotels2 - U.K Supreme Court finds that a one-sided agency agreement favouring the dominant agent can still represent agency
A company ("Med") was found to provide bookings to its on-line customers at Mediterranean and Caribbean hotels as agent for the hotels (so that there was no U.K. VAT on its revenues) notwithstanding some significant departures from what one normally would expect to see in an agency arrangement – many of which Lord Neuberger attributed to Med’s superior negotiating position. The point may be that if, in broad-brush terms, the arrangement was intended to be and was implemented as an agency arrangement, such departures do not necessarily detract from agency.
Neal Armstrong. Summaries of Commissioners for HM Revenue and Customs v. Secret Hotels2 Ltd., [2014] UKSC 16 under General Concepts – Agency, and – Substance.