News of Note
Birchcliff - Tax Court of Canada finds that raising share equity through a lossco immediately before its amalgamation was abusive
Email this ContentFollowing the nullification of the original Birchcliff decision, a fresh judgment has been issued.
That case concerned a newly-launched public corporation ("Birchcliff") accessing the losses of a lossco ("Veracel") in order to shelter the profits from producing oil and gas properties which it was acquiring. Rather than financing the properties directly, private placement investors were told that they could subscribe for subscription receipts of Veracel instead, which was not a problem to them because their subscription receipts would be converted into Veracel Class B common shares as a transitory step under a Plan of Arrangement in which Veracel was then amalgamated with Birchcliff. As the investors received a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided. The original Veracel shareholders got a modest preferred share interest in Amalco, which was redeemed for cash.
As part of his description of the facts, Jorré J made a finding that Birchcliff’s purpose in amalgamating with Veracel was to access the Veracel losses, given that Birchcliff did not need Veracel if all it wanted to do was an equity raise. However, when he got to his GAAR analysis of s. 245(3), he stated:
[I]t is absolutely clear that the series of transactions here was not undertaken primarily for purposes other than to obtain the tax benefit. Therefore, the series is an avoidance transaction.
He did not cite any authority for his equating of a series with a transaction.
His abuse (s. 245(4)) analysis was straightforward. He stated:
The statutory provision itself shows that the policy underlying the provision is that the “minority” predecessor, i.e. the predecessor whose shareholders, were they acting in concert, would not have control in the amalgamated corporation, will lose its tax attributes, its losses, on an amalgamation with another corporation. It does not include what might be described as contingent shareholders like the Class B shareholders here.
The artificial insertion of Class B shareholders of Veracel, persons whose shares’ only purpose was to be converted into common shares, and whose shares had such a short existence that they had to be deemed by the plan of arrangement to be created before the amalgamation, is a manipulation of the shareholdings of a predecessor contrary to the object of the rules in subsection 256(7).
Consequently, there was an acquisition of control for purposes of the Veracel losses.
Neal Armstrong. Summaries of Birchcliff Energy Ltd. v. The Queen, 2017 TCC 234 under s. 245(3), s. 245(4), s. 251.2(2)(a) and General Concepts – Sham.
Four further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for five French technical interpretation released last week and in April 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for December.
CRA is revising its procedures in response to BP Canada
In response to a question on what is its policy on tax accrual working papers following BP Canada (which was not appealed based on a discomfort in seeking before the Supreme Court confirmation of an unfettered right to information), CRA indicated that its policy is to request only the information that it believes it requires, with its focus being on determining what the taxpayer has done (as contrasted apparently with seeking evidence of the taxpayer’s concerns about what it did). CRA has set up a committee and is revising its procedures. If the taxpayer receives an unreasonably burdensome request, it should contact a senior large case manager or TSO assistant director.
Neal Armstrong. Summary of 20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.11 under s. 231.1(1)(d).
CRA rules on the s. 107(2) rollout of taxable Canadian property by a non-resident former s. 75(2) trust to its corporate beneficiary
CRA ruled that the s. 107(2) rollover applied to the distribution by a non-resident trust, to which s. 94(8.2) (effectively, s. 75(2)) no longer applied because its settlor had been dissolved, of Canadian rental property to its sole beneficiary, which was a (presumably non-resident) corporation related to the Canadian-resident lessee of the property. The stated purpose of the distribution was to avoid the application of the 21-year rule in s. 104(4) to the property, which had a significant accrued capital gain and recapture. No representation was made that the settlor was not wound-up for the purpose of permitting the accessing of the rollover.
CRA also ruled that mortgage debt, and unsecured debt owing to a group “Finco,” that was assumed on the distribution, qualified as an amount payable for the property by the beneficiary for purposes of s. 20(1)(c)(ii).
Neal Armstrong. Summaries of 2016 Ruling 2016-0635051R3 under s. 107(2) and s. 20(1)(c)(ii).
Proposed Metro acquisition of PJC accommodates non-cash dividends by PJC Holdcos to electing Canadian shareholders
Under the proposed acquisition of The Jean Coutu Group (PJC) Inc. by Metro Inc. under a triangular amalgamation involving a subsidiary of Metro, PJC shareholders will be given a choice of cash or Metro shares, subject to proration to accommodate the intended global allocation of cash of approximately $3.377 billion and Metro shares valued at approximately $1.126 billion. Cash will be paid through the issuance of full-PUC redeemable prefs of Amalco which will be immediately redeemed. As an exception to this basic mechanic, a resident taxable PJC shareholder is given the option of rolling its PJC shares into a new single-purpose Quebec holding company, with that Holdco then being included in the amalgamation and with its shares effectively converted into Metro shares or cash in the same way. The extensive stated limitations on what a “Qualifying Holdco” is permitted to do state that it:
will not have paid any dividends or other distributions, other than an increase in stated capital, a stock dividend, a cash dividend financed with a daylight loan or a dividend paid through the issuance of a promissory note with a determined principal amount and any such promissory note issued in relation to the payment of any such dividend will have been capitalized… .
Similar planning occurred in the AIP acquisition of Canam.
Neal Armstrong. Summary of PJC Circular under Mergers & Acquisitions – Amalgamations – Triangular Amalgamations.
University Hill – Federal Court of Appeal finds that a settlement agreement agreeing as to round percentages of expenses that were unreasonable accorded with Galway
Boivin JA found that a settlement agreement with CRA, that stipulated the disallowance of various categories of expenses incurred by film-production tax-shelter LPs or round percentages thereof or formula amounts, did not violate the Galway principle given that this was not inconsistent with s. 67, which could be applied to disallow only a portion of such expenses. Essentially, the point is that Galway precludes a compromise that is irreconcilable with the ITA, but does not preclude a compromise on the facts.
Neal Armstrong. Summaries of University Hill Holdings Inc. (formerly 589918 B.C. Ltd.) v. Canada, 2017 FCA 232 under s. 169(3) and s. 152(1).
CRA rules that a U.S. public corporation can issue flow-through shares for work under a farm-in agreement with a Canadian sub
A U.S. corporation (Bco) whose shares were listed on a redacted exchange was a principal business corporation by virtue of most of its assets being shares and debt of Canadian mining or exploration subsidiaries. In order that it can finance exploration work on properties of one such sub (Aco) through issuing flow-through shares to be issued to Canadian investors and listed on that exchange, Bco will enter into simple farm-in agreements with Aco respecting two of those properties (consisting of mining claims) and earn a working interest in those properties by expending the flow-through proceeds on related exploration work.
CRA ruled that Bco’s status as a U.S. public corporation would not preclude it from renouncing CEE provided that it was carrying on business in Canada. The Additional Information indicated that once it had earned the working interests, Bco might transfer those interests to Aco under s. 85(1).
Neal Armstrong. Summaries of 2016 Ruling 2015-0614081R3 under s. 66(12.71) and s. 66.1(6) – CEE – (f).
Pre-production mine development expenses that qualify under CEE – (g.4) need not qualify under (g.3)
Para. (g.3) of the Canadian exploration expense definition provides that pre-production mine development expenses could qualify if, among other conditions, they were incurred under an agreement entered into before March 21, 2013. Would this requirement be satisfied where a principal-business corporation issued flow-through shares pursuant to a December 31, 2012 flow-through share agreement but incurred the 2013 expenses under the look-back rule pursuant to an agreement which it entered into with a subcontractor in 2013 but after March 21, 2013?
CRA ducked this question by noting that, even if the relevant agreement for purposes of the March 21, 2013 cut-off was the subcontracting agreement, the expenses would qualify under para. (g.4) as having been incurred before 2015.
Neal Armstrong. Summary of 11 October 2017 Internal T.I. 2017-0719181I7 F under s. 66.1(6) – CEE – para. (g.4).
CRA will issue s. 116 certificates based on the draft s. 87(8.5) foreign merger rollover
Draft ss. 87(8.4) and (8.5) in approximate terms provide that on a same-country related-party foreign merger that meets specified conditions, the foreign merging corporations can file a joint election to have shares that are (non-treaty protected) taxable Canadian property be deemed to have been disposed of on a rollover basis on the merger.
CRA will grant s. 116 certificates based on treating this draft legislation as already being in effect, provided that some back-up for the adjusted cost base of the disposed-of shares is provided to it. No share valuation is required. CRA did not mention any concern about one of the foreign corporations no longer being around to make the election.
This CRA response presumably also applies to the same and similar draft s. 87(8.4) and (8.5) rules respecting trust units and partnership interests, respectively.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.14 under s. 87(8.5) and s. 116(1).
Abenaim – Tax Court of Canada finds that an amount received by a terminated employee (claiming oppression) exceeding 18 months’ salary was non-taxable
A senior employee who, in the somewhat distant past, had also been a shareholder, received damages following his termination, and pursuant to a court-mediated settlement agreement, that were well in excess of the going rate for compensation in lieu of notice of 18 months, and received a T4 treating the full amount as a taxable retiring allowance. D’Auray J treated the portion of the damages in excess of 18 months’ salary as a non-taxable receipt given her characterization of his claim against his former employer as being grounded principally in oppression as contemplated in the CBCA and her finding that, indeed, he had been oppressed a lot.
Neal Armstrong. Summary of Abenaim v. The Queen, 2017 CCI 223 under s. 248(1) – retiring allowance.