News of Note
CRA confirms the flexibility of the cross-border PUC-restoration rule in s. 212.3(9)(b)(ii)
Email this ContentA majority of the common shares of a Canadian public corporation (Pubco) were held by foreign holdcos (ultimately controlled by Foreign ‘Parent) directly or through “Canholdcos.” Most of Pubco’s assets were investments in foreign affiliates, and the paid-up capital of the various “cross-border classes” of shares (being the Pubco shares held directly by a foreign holdco and the shares held by the foreign holdcos in the Canholdcos) had been previously reduced under s. 212.3(7) as a result of Pubco investing in an offshore Finco which, in turn, financed a large development project of an indirect offshore subsidiary of Pubco (Opco).
Under the ruled-upon transactions, Opco first borrowed U.S. dollars to repay some of the Finco loans (directly and by way of repaying loans from Forco 2). Finco, in turn, inter alia paid dividends on its common shares and “distributions” on its mandatorily redeemable preferred shares to Pubco (the “Finco Distributions”). Pubco, in turn, inter alia lent those funds to a Canadian subsidiary (Canco 1) of one of the foreign holdcos, with Canco 1 subscribing for preferred shares of a Canadian subsidiary (Canco 2) of a second foreign holdcos, with that second Canadian subsidiary effecting a return of capital to its foreign holdco on a class of shares which had not been subject to a s. 212.3(7) grind because this structure was off to the side rather than being “above” Pubco.
CRA ruled that the Finco Distributions were receipts of property described in s. (B) of variable A of the s. 212.3(9)(b)(ii) formula, i.e., they restored the cross-border PUC held in Pubco and in the relevant Canholdcos on the basis that Pubco had received equivalent property as dividends on the shares of the subject corporation (Finco). Thus, it did not matter that:
- The Finco Distributions were sourced from a borrowing beneath the subject corporation rather than being a distribution of sales proceeds or profits;
- Insofar as the Canholdcos were concerned, the Finco Distributions received by Pubco were not distributed up to them but, instead, were distributed in a “sideways” manner; and
- The s. 212.3(9) bump to the PUC of the cross-border classes (in Pubco and the Canholdcos) was banked rather than utilized. (This may have occurred because the transactions under consideration were completed before the rulings were ultimately given.)
That was the easy part. Pubco had previously elected under s. 261(3) for the U.S. dollar to be its elected functional currency. CRA indicated that the PUC of the cross-border classes for both Pubco and the Canholdcos should be computed at the same time in U.S. dollars (on the basis that the entries to the PUC accounts for the cross-border classes held in the Canholdcos were relevant to the Canadian tax results of Pubco) and also in Canadian dollars (see also 2016-0642111C6). CRA then ruled that the full restoration of the cross-border PUC was dependent on the total amount of the Finco Distributions being no less than the previous net grinds to the PUC of the cross-border classes of shares computed both in Canadian and U.S. dollars.
Neal Armstrong. Summaries of 2016 Ruling 2016-0629011R3 under s. 212.3(9)(b)(ii) – A(b) and s. 212.3(18)(c)(v).
Deloitte v. Livent – Supreme Court of Canada finds that auditor negligence in providing comfort to investors in a public company did not result in liability
Deloitte was found to have negligently provided a comfort letter in October 1997, which assisted Livent in raising money from new investors, and to have also negligently provided an unqualified audit opinion in April 1998 respecting Livent’s 1997 financial statements. Gascon and Brown JJ, speaking for a bare majority of the Supreme Court, found that Deloitte was not liable to the receiver for Livent for the negligent comfort letter, because it helped accomplish Livent’s purpose of raising money, stating:
Deloitte never undertook, in preparing the Comfort Letter, to assist Livent’s shareholders in overseeing management; it cannot therefore be held liable for failing to take reasonable care to assist such oversight. … Consequently, the increase in Livent’s liquidation deficit which arose from its reliance on the Press Release and Comfort Letter was not a reasonably foreseeable injury.
However, they went on to find that Deloitte was liable for the increase in Livent’s liquidation deficit which followed the completion of the negligent statutory audit, stating that the very purpose of a statutory audit was to “to allow shareholders to collectively 'supervise management’,” so that the consequences of failure to permit the shareholders to see the losses that were being racked up by management resulted in Deloitte responsibility for those losses.
The minority thought that Deloitte should not be liable on either basis.
This decision might assist those who have provided negligent tax disclosure in offering documents.
Neal Armstrong. Summary of Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 under General Concepts – Negligence.
CRA indicates that the free provision a home electric charging station for an employment-required vehicle may be non-taxable
A free charging station is provided at an employee’s home for a car used in performing employment duties. CRA considers that “in many cases the employer would likely be the primary beneficiary, provided that ownership of the charging station is not transferred to the employee, and that its cost (including installation) is reasonable in the circumstances,” such that the provision of the station would not be a taxable benefit. As the charging station draws on the employee’s electricity, the employee effectively bears a portion of the operating costs. In this regard, CRA stated that “if an employer reimburses an employee for reasonable employment-related electricity costs paid by the employee, the reimbursement will not generally give rise to a taxable benefit.”
Neal Armstrong. Summaries of 14 September 2017 CPA Alberta Roundtable, Q.17, 2017-0703881C6 under s. 6(1)(a), s. 6(1)(k) and s. 8(1)(h.1).
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for two French technical interpretations released last week and four technical interpretations released in March and February of 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ¾ years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for January.
CRA indicates that a s. 85 roll of purchased goodwill at an agreed amount of unamortized cost can trigger recapture
Goodwill of a business was purchased in 2016 for $100,000, resulting in a cumulative eligible capital balance on December 31, 2016 of $75,000 (i.e., 75% of $100,000) ignoring any s. 20(1)(b) amortization deductions. The business owner (Mr. X) now wants to roll the business into a Newco under s. 85(1), electing at $100,000 (which, in the posited example, equals the boot).
This elected amount would produce $25,000 in recapture of depreciation. The essential reason is that s. 13(39), which might otherwise increase the undepreciated capital cost by $25,000 on this disposition, does not apply where s. 85(1) (or any of eight other listed rollover provisions) applies to the disposition.
However, on an ultimate disposition of the goodwill by Newco, Newco could avail itself of the s. 13(39) rule. CRA did not evince conviction that the above results represent a major anomaly.
Neal Armstrong. Summary of 27 October 2017 External T.I. 2017-0688971E5 F under s. 13(38)(c).
CRA applies the B2B shareholder loan rules to a term deposit pledged by a family corporation to secure a business loan taken out by a shareholder
A 50% limited partner (Ms. X) funded her investment in an LP jointly owned with her husband through a $3M bank loan that was secured by a pledge to the bank of a $3M term deposit held by a corporation (Corporation B) equally owned by her and her husband. In finding that the back-to-back loan rules in s. 15(2.6) et seq. deemed her to owe $3M to Corporation B, CRA indicated that:
- Ms. X had an amount outstanding ($3M) to an “immediate funder” (the bank),
- the bank held an amount (the $3M term deposit) owing to an “ultimate funder” (Corporation B), and
- "the condition in clause 15(2.16)(c)(i)(B) would be satisfied" (e.g., the $3M loan was permitted to remain outstanding because the term deposit was outstanding).
CRA also stated that the term deposit might also be a “specified right.”
Neal Armstrong. Summaries of 31 October 2017 External T.I. 2017-0690691E5 F under s. 15(2.16)(c)(i)(B) and s. 15(2.16)(c)(ii).
Income Tax Severed Letters 27 December 2017
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on using a combination of a dirty s. 85 reorg, the s. 7 rules and the IT-426R earnout (cost-recovery) rules for an employee incentive buyout transaction
The (corporate) shareholders of Holdco (a Canadian-controlled private corporation) wish to accommodate the purchase of shares of the Holdco for an operating subsidiary (Opco) by an Opco key employee on an earnout basis and with the key employee’s purchase being governed by the s. 7 rules. (This cannot be accommodated by issuing treasury shares of Holdco or Opco to the key employee on an earnout basis as the governing Business Corporations Act requires that shares be fully-paid on issuance.) Under the ruled-upon transactions:
- The Holdco shareholders transfer a portion of their Holdco common shares on a s. 85(1) rollover basis to Opco in consideration for tracking preferred shares of Opco;
- The key employee immediately purchases those Holdco common shares from Opco in consideration for five annual instalments, with each annual instalment based on the most recent year’s earnings (plus, in the case of the first instalment, the opening shareholders’ equity), with adjustments to the purchase price on any IPO or business acquisition; and
- Each instalment payment is immediately dividended by Opco to the Holdco shareholders on the tracking preferred shares.
Re 2, CRA rules that the cost-recovery method in IT-426R was to be used by Opco.
Re 3, s. 55(2) deemed the tracking dividends to be capital gains to the holders of the tracking preferred shares.
There’s more. Before the implementation of the above transactions, Holdco and Opco adopted a policy of dividending out all of their operating earnings – but deferred paying any of these dividends until the rulings were granted. CRA ruled that the dividend determination time for the “Second Annual Dividends” (i.e., dividends payable based on the annual income for the Opco taxation year ending after the sale of the Holdco common shares by Opco to the key employee) is the time immediately before their payment rather than the time immediately before the payment of the previous dividends, so that the safe-income exception in s. 55(2.1)(c) could access the more recent earnings.
Neal Armstrong. Summaries of 2015 Ruling 2015-0589471R3 under s. 12(1)(g), s. 55(1) – safe income determination time and s. 85(1).
The MLI is estimated to be effective for most calendar-year Canadian taxpayers starting January 1, 2020
At the time of the signing of the Multilateral Instrument in June 2017, Canada listed 75 treaties as covered tax agreements. Since then, some additional countries that have either joined the ad hoc group or signed the multilateral instrument with a view to a treaty with Canada. There will be significant consideration to including those treaties where there would be a match prior to ratification.
Canada agreed only to the BEPS minimum standards plus mandatory arbitration. This was done largely for timing reasons (plus the irreversibility of a decision to agree to a higher level of standards), and Finance is actively considering whether to adopt additional provisions. Furthermore, the fact that a particular measure was not adopted in June does not indicate that Canada does not agree with the related policy, and Canada may pursue that policy in bilateral negotiations.
There are uncertainties as to when the MLI will come into effect insofar as Canada is concerned. With respect to withholding taxes, entry into force on January 1, 2019 is possible, although January 1, 2020 also is a possibility. With respect to other taxes and in relation to taxpayers with calendar taxable periods, entry into force effective January 1 of their 2020 calendar is quite likely (assuming a “match” with the other relevant country).
20 November 2017 CTF Annual Conference - Department of Finance on BEPS
CRA considers that a self-insured health care spending account (“HCSA”) for a sole employee-shareholder likely will not qualify as a private health services plan
CRA considers that:
In a situation where a corporation provides a self-insured HCSA for its only employee who is also its sole shareholder … it is likely that the sole employee-shareholder would be reimbursed for the full amount allocated to him or her annually.
On this basis, CRA would view the arrangement as not being a plan of insurance and, thus, not a private health services plan, so that there would be a taxable benefit to the employee-shareholder, even where the benefits were comparable to those available to non-shareholder employees performing similar services for similarly-sized businesses.
Neal Armstrong. Summary of 14 September 2017 CPA Alberta Roundtable, Q.9, 2017-0703871C6 under s. 248(1) - private health services plan.