News of Note
Milgram – Federal Court finds that it has the jurisdiction to quash an abusive decision of CRA to assess, even though the resulting assessment was objected to
Email this ContentMilgram, a Liechtenstein-resident trust that had determined that it might be a deemed resident under s. 94, made a 2015 filing under the CRA voluntary disclosure program for its 2003 to 2014 taxation years (for which the financial information was still available), and in December 2015, the VDP officer accepted the disclosure. However, in a September 5, 2018 proposal letter, the Minister proposed to assess Milgram for its 1998 to 2002 taxation years (the “earlier years”) based on an estimate of Milgram’s investment income for those years, stating that this assessment came about due to “misrepresentation” attributable to “neglect, carelessness or wilful default.” After Milgram applied for judicial review of the proposal letter, the Minister in February 2021 assessed the earlier years, to which Milgram objected.
Go J declared that the Minister’s decision to assess Milgram for the earlier years after her acceptance of Milgram’s voluntary disclosure constituted an abuse of process, quashed that decision and directed the Minister “to consider the Court’s declaration and to take such actions as are necessary to give effect to the reconsidered decision.” In reaching this result, Go J:
- Found (citing Dow Chemical) that because Milgram was challenging the Minister’s conduct or process that led to the proposed assessment, and not the proposed assessment itself, it was raising a “matter” that fell within the Federal Court’s jurisdiction under s. 18.1(1) of the Federal Courts Act.
- Noted that, indeed, Dow Chemical had approved the statement in JP Morgan that the “‘[t]he Tax Court does not have jurisdiction on an appeal to set aside an assessment on the basis of reprehensible conduct by the Minister leading up to the assessment, such as abuse of power or unfairness’, therefore in such a circumstance, ‘the bar in section 18.5 of the Federal Courts Act against judicial review in the Federal Court does not apply’…”
- Found that the Minister had the discretion to waive tax, not just interest and penalties (and the Crown’s argument to the contrary did not comport with the Minister’s decision to assess back only to 1998 even though Milgard had disclosed at the outset that it had been formed in 1964);
- Stated, before noting that the voluntary disclosure by Milgard was complete and accurate rather than containing a misrepresentation, that “in reneging on her own prior decision by impugning, without any justifications, misrepresentation on the Applicant, the Minister’s conduct violates a sense of fair play and the Decision amounts to an abuse of process.”
In connection with her final declaration above, she noted that:
- Sifto (which had been cited with approval in Dow Chemical) had indicated that a remedy for unreasonable conduct of the Minister could include issuing an order precluding the Minister from enforcing a penalty assessment or collecting a resulting tax debt; and
- In light of the circumstances, including that Milgram’s 2021 notices of objection had not yet been adjudicated, “quashing the Minister’s decision to reassess may therefore have the practical effect of ordering the Minister to reconsider her decision.”
Neal Armstrong. Summary of Milgram Foundation v. Canada (Attorney General), 2024 FC 1405 under Federal Courts Act, s. 18.5.
Income Tax Severed Letters 11 September 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in September and August of 2001. Their descriptors and links appear below.
These are additions to our set of 2,940 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 23 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
It is proposed that Filo be jointly acquired by BHP for BHP cash, and by Lundin Mining for cash and shares
It is proposed that Filo, a TSX-listed CBCA corporation indirectly holding a large deposit in Argentina and Chile, will be acquired by a Canadian joint venture company (JVCo) to be held on a 50-50 basis indirectly by (TSX-listed) Lundin Mining and by a Canadian subsidiary (BHP) in the BHP Group (the parent’s primary listing is in Australia). Lundin Mining holds an adjacent property in Argentina (held indirectly by a Canadian subsidiary termed “Josemaria”).
A Contribution Agreement between Lundin Mining and BHP contemplates that Lundin Mining will contribute Josemaria to JVCo for its 50% interest and BHP will contribute US$690 million in cash for its 50% interest. Furthermore, however, they will jointly purchase all the Filo shares for consideration consisting of BHP and Lundin Mining cash of around $1.908 billion and $0.859 billion, respectively, and the issuance by Lundin Mining of around 92.1 million shares. The Filo shareholders can elect to receive cash or Lundin Mining shares, subject to proration to maintain the agreed mix. All the Filo shares (including the 5% stake already held by BHP and the 0.5% stake of Lundin Mining) will also be contributed to JVCo.
The plumbing to accomplish the final structure of JVCo holding all of Filo and Josemaria in general involves:
- BHP lending both the Filo acquisition cash and JV cash to Lundin Mining and receiving the "BHP notes";
- Lundin Mining then acquiring all the Filo shares (not already held by BHP and it) for the agreed cash and share consideration;
- Lundin Mining then contributing Filo (through intermediate Canadian holding companies) to JVCo in consideration for shares and the assumption of the BHP notes; and
- BHP converting the BHP notes into JVCo shares (as well as transferring its existing 5% interest in Filo to JVCo for JVCo shares);
so that, after the dust settles, JVCo is held on the agreed 50-50 basis.
Those Filo shareholders who elect to receive Lundin Mining shares are also required to receive a nominal amount of cash ($0.0001 per Filo share), so that they can only potentially receive rollover treatment if they qualify as taxable investors and request, within 60 days of the effective date of the CBCA plan of arrangement, that Lundin Mining jointly elect with them under s. 85.
Neal Armstrong. Summary of Circular of Filo Corporation under Mergers & Acquisitions – Mergers – Shares for Shares and Cash.
CRA rules on successive butterflies to effect the creation of a 2nd public corporation
CRA ruled on butterfly spin-off transactions to effect the split-up of DC2, a public corporation, into two publicly listed companies: DC2 and SpinCo. There were to be two successive butterflies since the subsidiaries to be transferred to SpinCo started off as subsidiaries of a wholly-owned subsidiary of DC2, namely, DC1. Accordingly, such subsidiaries were to be first dropped under s. 85(1) into a Newco subsidiary of DC1, then Newco was to be spun-off by DC1 to a newly-formed subsidiary of DC2 (SpinCo Sub) under a butterfly, and then DC2 was in turn to effect a butterfly spin-off pursuant to a plan of arrangement of SpinCo Sub to SpinCo (now held by the DC2 shareholders).
DC1 was a “specified wholly-owned corporation” so that, pursuant to s. 55(3.02), and like DC2, it was not subject to the types-of-properties strictures on its butterfly spin-off.
The ruling letter provides that the Arrangement Agreement was to state:
DC2 and SpinCo will:
a. covenant and agree with and in favour of each other that for a period of time after the Effective Date to be agreed upon, they will not (and they will ensure that their respective subsidiaries will not) take any action or enter into any transaction that could cause the transactions contemplated in the Plan of Arrangement or by the Arrangement Agreement to be taxed in a manner that is inconsistent with the rulings provided in this letter without obtaining another tax ruling or an opinion of a nationally recognized accounting firm or law firm that such action or transaction will not have such effect; and
b. agree to indemnify each other for losses suffered or incurred as a result of or in connection with a breach or non-compliance with the covenant described in item (a) above.
Neal Armstrong. Summary of 2024 Ruling 2023-0987001R3 under s. 55(3.02).
Nicosia - Tax Court finds that individuals’ brief occupancy of their newly-constructed home was sufficient to exempt its sale (no self-supply was assessed)
Two adult siblings, while living with their parents, used funds mostly provided by their parents to acquire and tear down an existing Toronto home, construct a new house and list it for sale immediately after the issuance of a certificate of occupancy, with the sale occurring half a year later.
Yuan J accepted the siblings’ testimony that they occupied the new house for a period of around a month prior to the issuance of the occupancy certificate. Regarding the exemption in ETA Sched. V, Part I, s. 2 (for a sale of a residential property by a non-builder), this finding helped to support that the property was acquired for personal use rather than in the course of a business or an adventure in the nature of trade. On the other hand, if the siblings were builders who resided at the new house prior to the sale and the s. 191(1) self-supply rule did not apply to them due to the s. 191(5) exemption for building for own use, the sale would be exempted pursuant to Sched. V, Part I, s. 3. If they were builders without the s. 191(5) exemption applying, then their occupation of the house as a residence prior to the start of the assessed reporting periods would attract GST/HST on a self-supply occurring at the time of such residential occupancy (which had not been assessed) - rather than at the time of the subsequent sale, which would be exempted under Sched. V, Part I, s. 4. Accordingly, given the occupancy finding, the sale was exempted under each alternative.
It thus was unnecessary to find whether the siblings were builders, and Yuan J noted uncertainty on this point given inter alia that around $1 million of the profit on the sale went to the siblings’ parents.
Neal Armstrong. Summary of Nicosia v. The King, 2024 TCC 112 under ETA Sched. V, Part I, s. 4.
CRA has officially published the June 2024 STEP Roundtable
CRA released today for publication its official written answers to the question posed to it at the 4 June 2024 STEP Roundtable. The table below lists and provides brief descriptions of the responses and links to the more detailed summaries that we prepared in June.
Income Tax Severed Letters 4 September 2024
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that post-butterfly sales and redemptions of shares received on the butterfly were not part of the same series
CRA ruled on whether subsequent sale and redemption transactions involving shares that had been distributed on the third butterfly reorganization described in 2020-0848061R3 would cause the s. 55(3)(b) exception to cease to be available pursuant to s. 55(3.1).
In that butterfly reorganization, a pro rata portion of the shares of a corporation (Xco) was spun off by a corporation owned jointly by two unrelated family corporations (Dco and Eco) to the transferee corporation of Eco, so that, following appropriate amalgamations, the two families’ holding companies (Dco Amalco and Eco Amalco) now held “their” Xco shares directly. The balance of the Xco shares were held by the holding company for a third family (Aco Amalco, for the family of A) which had also participated indirectly (through a predecessor) in the butterfly reorganizations but not so as to affect its direct ownership throughout of Xco shares. Some Xco shares were also held by the holding company for a son of A, and by an unrelated third party.
Now, about a year later, Dco Amalco and Eco Amalco wanted to exit from their investment in Xco rather than committing the additional funds required to expand the Xco business. Accordingly, it was proposed that Aco Amalco would purchase the Xco shares of Eco Amalco (which would be problematic under s. 55(3.1)(c) if this occurred as part of the same series of transactions as the third butterfly) and that Xco would redeem the shares of Dco Amalco, including through the application of share subscription proceeds received from the holding company for the son of A (which would be problematic under s. 55(3.1)(d), as expanded by s. 55(3.2)(e), if part of the same series) – so that Xco would now mostly be owned by the two A-family companies.
In explaining its granting of the ruling, the CRA summary stated:
The taxpayers’ representations that the Proposed Transactions are not part of the same series of transactions as the Sequential Butterfly are reasonable and supported by the facts.
Neal Armstrong. Summary of 2023 Ruling 2022-0958601R3 under s. 55(3.1)(c).
CRA rules on sequential wind-ups of child, then grandchild, under s. 88(1) where the dissolutions were held in abeyance until resolution of tax litigation
After preliminary transactions, ParentCo and its historic subsidiary, SubCo were to be the only partners of a general partnership (Partnership C); and Partnership C, ParentCo and SubCo’s newly-incorporated subsidiary, NewCo2 were to be the only partners of a second general partnership (Partnership D).
Except as described below, SubCo was then to be wound-up into ParentCo (so that Partnership C would be dissolved by operation of law on a s. 98(5) rollover basis) and then, at least one week later, NewCo2 was to be wound-up into ParentCo (so that Partnership D also would be dissolved by operation of law on a s. 98(5) rollover basis). However, SubCo was currently in disputes (entailing litigation) with CRA regarding the results of multiple audits, and it was not expected that these disputes would be resolved prior to the implementation of the proposed transactions. Accordingly, the proposed steps contemplated that all the other steps for the winding-up of SubCo would occur on the same day, but the articles of dissolution for SubCo would not be filed until the tax litigation was settled – and similarly for the winding-up of NewCo2 which was to be commenced and largely implemented perhaps one week later.
CRA ruled that s. 88(1) would apply “on” the winding-up of SubCo, then of NewCo2, which it defined as all the steps from commencement of the winding-up to dissolution. Although not stated, presumably it was intended that the rollover provisions (e.g., the non-disposition rule in s. 88(1)(a.2) for a partnership interest) would apply from the outset in the taxation year that all these steps other than the dissolution occurred. CRA also provided somewhat apodictic rulings regarding the application of s. 98(5) to the windings-up of Partnerships C and D into ParentCo (i.e., it will apply if its conditions are met), including contemplating that there could be a bump of land, or shares of a public company.
One of the preliminary transactions on which CRA did not rule was the sale by Partnerships C and D of Canadian resource properties (CRP) to ParentCo for cash consideration so as to reduce the balances in their successor CCEE and CCOGPE, thereby minimizing the risk of s. 66.7(16) applying as a consequence of CRP transfers to ParentCo on their windings-up. (ParentCo expected to earn income from the CRP so transferred to it by Partnerships C and D at least equaling the amount of the successor CCDE and successor CCOGPE related to that CRP that might otherwise been stranded pursuant to s. 66.7(16) as a result of the partnerships’ dissolution.)
Neal Armstrong. Summaries of 2023 Ruling 2022-0941241R3 under s. 88(1), s. 66.7(16) and s. 98(5).