News of Note
CRA confirms that a CFA taxation year is determined under foreign tax law
Email this ContentCRA has confirmed that the taxation year of a foreign affiliate for purposes of the foreign affiliate rules normally is the taxation year of the foreign affiliate under the taxation laws of its country of residence. Accordingly, an intra-group transfer of the holding company for subsidiaries in a particular foreign country to another non-resident company in the group will not cause a short taxation year. This is so even though this transfer results in the transferee company becoming the company which prepares consolidated tax returns (albeit, still on a calendar year basis) for that foreign country.
In the old days, you could not get CRA to rule on completed transactions. In this ruling, the proposed transaction is the filing of the foreign group consolidation election (i.e., a foreign tax law election) - everything else was a completed transaction.
Neal Armstrong. Summary of 2012 Ruling 2012-0449941R3 under s. 95(1) - taxation year.
CRA indicates that late-filed s. 98(5) designations will be accepted at CRA's discretion
Where a partner carries on a partnership's business after the partnership's dissolution, s. 98(5) of the Income Tax Act allows that partner to make a designation to "bump" the cost amount of non-depreciable capital property. CRA has stated that, although the Act does not provide any mechanism for late-filed or amended designations, CRA may accept such designations at its discretion.
Scott Armstrong. Summary of 20 September 2012 T.I. 2012-0452411E5 under s. 98(5).
Income Tax Severed Letters 7 November 2012
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is available for your viewing.
TORC uses a triangular amalgamation with Vero to effect a backdoor IPO
A private Alberta corporation (TORC) will issue ordinary and flow-through subscription receipts on a private-placement basis, then engage in a triangular amalgamation with a public Alberta company (Vero), so that its shareholders become shareholders of Vero - and the holders of the flow-through subscription receipts, viewed as a right now to acquire (flow-through) Vero shares, exercise that right.
Neal Armstrong. Summary of Joint TORC/Vero Circular under Mergers & Acquisitions - Triangular amalgamations.
Recent convertible debenture offerings continue to corroborate double-digit inter-company interest rates
Junk bond yields have declined. For example, the Merrill Lynch U.S. High Yield Master II Index (which has no published Canadian equivalent) declined from a high of 23.26% in December 2008 to a low (so far) of 6.27% on October 18, 2012.
There nonetheless is evidence in the Canadian convertible debenture market to support inter-company (or cross-border) interest rates in excess of 10% where the borrower is not blue-chip on a stand-alone basis. Although CRA treats convertible debentures as indivisible instruments (see IT-96R6), economically they consist of a warrant, and a debenture with an implied yield which is higher than the stated coupon. For example, in the ENTREC offering of 7% $1,000 convertible debentures, if the embedded call option were valued at $250 so that the included "pure" debenture in effect was being purchased for $750 then, depending on what assumptions were made as to when the convertible debentures will likely be converted or mature, the yield on that pure debenture might be over 15%. Moving more downstairs, the NAT offering of 10% convertible debentures had an even higher implied yield.
Neal Armstrong. Summaries of ENTREC and NAT short form prospectuses under Offerings - Convertible Debentures.
Global Equity Fund - Federal Court of Appeal uses s. 9 jurisprudence in a GAAR case to establish the object and spirit of the Act's business loss provisions
The corporate taxpayer implemented a loss generation plan similar to those in 1207192 Ontario and Triad Gestco. It had a subsidiary declare a stock dividend of preferred shares in order to deplete the value of its common shares of the subsidiary, and sold those shares to a family trust in order to generate a loss - which it reported on income account because it had a securities trading business. These transactions were found to abuse ss. 3, 4, 9 and 111, which reflect a policy that "business losses must be grounded in some form of economic or business reality" - so that the loss was denied under the general anti-avoidance rule.
A difficulty for the Crown was that the central provision for the computation of business income or loss (s. 9) is antiquated and essentially devoid of substantive content. How on earth could the Crown establish its "object, spirit or purpose" under the required "textual, contextual and purposive" approach?
No problem! Mainville, J.A. found that Canderel had established that s. 9's goal "is to obtain an accurate picture of the taxpayer’s profit [or loss] for the year," so that it was contrary to this object to recognize a "paper loss" under s. 9.
Neal Armstrong. Summaries of The Queen v. Global Equity Fund Ltd., 2012 FCA 272 under s. 245(4) and s. 152(9).
CRA confirms the gap in the Crown corporation definitions
Corporations that are owned only by various combinations of crown corporations described in ss. 149(1)(d) to (d.4) also qualify as (generally exempt) crown corporations under s. 149(1)(d.4). CRA has confirmed that this exemption does not apply to a corporation that is partly owned by the federal or provincial Crown (including, perhaps, by a corporation which is an agent for the Crown rather than being an owner in its own right) and partly owned by a qualifying Crown corporation.
Neal Armstrong. Summary of 12 October 2012 T.I. 2011-0428521E5 F under s. 149(1)(d.4).
CRA treats trailer fee rebate payments as trust distributions rather than inducements
CRA considered the payment by a mutual fund trust of rebates to a large investor equal to a proportionate part of the trust expenses used to fund the payment of trailer fees - and which the dealer in question had agreed to forego.
CRA indicated that this rebate payment generally will be treated in the usual manner as a distribution from the trust to the investor qua beneficiary - rather than as an "inducement" paid to the investor. The latter characterization, which could generally result in an income inclusion to the trust under s. 12(2.1), would have been problematic.
Neal Armstrong. Summaries of 12 October 2012 T.I. 2012-0448351E5 under s. 12(2.1) and s. 104(7.1) and summary of 16 October 2012 T.I. 2012-049061E5 under s. 104(13).
Income Tax Severed Letters 31 October 2012
This morning's release of 21 severed letters by the Income Tax Rulings Directorate is available for your viewing.
Ruling addresses complications of combining a split-up butterfly of DC with a Code s. 355 indirect spin-off of DC by non-resident public parent
In order for a non-resident publicly-traded corporation to distribute two of its three businesses to its shareholders as a dividend-in-kind (so that it effectively was converted into three publicly traded corporations), it was necessary for one of its indirect Canadian subsidiaries (DC - which was a direct subsidiary of Foreign Sub 1) to effect a butterfly reorganziation under which: a portion of its assets were butterflied to a new Canadian subsidiary of Foreign Sub 1 (TC); the equity of DC (in the form of new common shares issued on the usual preliminary s. 86 reorganization) was transferred indirectly to Foreign Spinco 1; and the shares of Foreign Spinco 1 (along with those of Foreign Spinco 2, which held the second business) were then distributed to the public. In light of the fact that the shares of Foreign Spinco 1 were to be disposed of by a specified shareholder of DC (Foreign Sub 1) to persons who are not related to Foreign Sub 1 (the public), it was necessary to give a representation in the ruling letter that the fair market value of the Foreign Spinco 1 common shares was not, at any time, during the course of the series of transactions derived 10% or more from the new common shares of DC.
The mechanics for transferring the new common shares of DC indirectly to Foreign Spinco 1 (involving a three-party circular back scratching arrangement) did not dovetail at all well with the "permitted exchange" definition - but CRA was accommodating.
The letter contemplates that DC likely would have only one type of (net) property. This result was facilitated not only through reclassification of any net ordinary-course trade receivables, inventories and prepaids as business assets, but also by treating a leasehold interest that DC was subleasing to a third party as business property rather than investment property.
DC received a comfort letter in the spring respecting the application of the proposed debt dumping rules (relating to the fact that it was to transfer some foreign subsidiaries to TC, thereby giving rise to a deemed dividend). This point now appears to be addressed by the relief in draft s. 212.3(18)(a)(i) (respecting non-arm's length acquisitions of subject corporations.)
Neal Armstrong Summaries of 2012 Ruling 2011-0431101R3 under s. 55(1) - distribution, and permitted exchange; s. 55(3.1)(b)(i); s. 20(1)(c).