News of Note
A TCPL sub trust is proposing to issue 60-year automatically convertible notes which will qualify as equity for rating-agency purposes
Email this ContentAn Ontario units trust controlled by TransCanada PipeLines Limited, which has already issued U.S.$1.95B in notes, is proposing to issue a further U.S.$1.2B, with the proceeds to be on-lent under unsecured subordinated notes to TCPL at roughly a 25 b.p. spread. The targeted result is that this debt will qualify for Basket ''C'' equity treatment by Moody's, and for Intermediate Equity Credit treatment by S&P. Somewhat equity-like features include the term of around 60 years, automatic conversion into preferred shares (with the same redemption amount) on specified insolvency events and the right of TCPL to satisfy interest payments in preferred shares.
The Trust notes and Sub notes of TCPL nonetheless clearly are debt for ITA purposes; but the U.S. tax disclosure states that there is no certainty that the IRS or a court will agree with TCPL’s position that they are debt. TCPL has the right to cause the Trust notes to be redeemed in the event that a “Tax Event” occurs, which in approximate terms refers to an opinion of independent counsel that any change in tax law (including its official administrative interpretation) would limit an interest deduction for U.S. tax purposes so as to result in the Trust or TCPL/TCC being subject to significant additional taxes or the interest being subject to significant withholding.
Neal Armstrong. Summary of Short Form Supplemented PREP Prospectus of TransCanada Trust under Offerings – Trust Notes.
Ontario LLP partners are limited partners subject to the negative ACB rule
2006 amendments to Ontario’s Partnership Act changed the liability protection for partners of LLPs from partial-shield protection (protection only from the negligence of another partner or an employee) to full-shield protection (generally protection against all but the partner’s own professional negligence or misconduct). This change had the effect of rendering partners of such LLPs as a “limited partners” under the s. 40(3.14) definition thereof, so that they are now subject to the s. 40(3.1) negative ACB rule. However, as members of a professional partnership, they benefit from the rule in s. 40(3.11)(B)(c), which allows current-year income to be included in their partnership interest ACB calculated for the year.
Neal Armstrong. Summary of Lorenzo Bonanno and Guy Buckley, "Limited Liability Partnerships," Canadian Tax Highlights, Vol. 25, No. 2, February 2017, p. 7 under s. 40(3.14).
Ozerdinc Family Trust v Gowling – Ontario Superior Court of Justice finds that the test of causation of damages from professional negligence is a “but for” test
It was acknowledged that a tax lawyer had fallen below the relevant standard of care in failing to advise clients that a new family trust which replaced an old family trust would, by virtue of s. 104(5.8), have a deemed disposition of its assets only four years later - which, in fact, occurred (see Grimes). The law firm argued that it should not be treated as the proximate cause of the loss, as the clients’ accounting firm should have been keeping track of the deemed disposition date.
Labrosse J applied Clements v. Clements, 2012 SCC 32 (“the test for showing causation is the ‘but for’ test… in other words that the injury would not have occurred without the Defendant’s negligence”) in finding that causation had been made out. The question of the degree of any negligence of the accounting firm only went to any liability of them for contribution and indemnity once an award of damages was made against the defendants in this action (the tax lawyer and his firm).
Neal Armstrong. Summary of Ozerdinc Family Trust v Gowling, 2017 ONSC 6 under General Concepts – Negligence.
CRA requirement for disregarded LLCs to now compute their surplus under the ITA engenders complications
At the annual 2016 CTF annual conference, CRA announced that, retroactive to all FA taxation years ending after August 19, 2011, a disregarded US LLC must apply ITA rules to its surplus computations rather than using the local tax law (under the Code) – and that if this entails a switch from using US tax law, CRA would treat deductions claimed under the Code as if they had been claimed under the ITA. Issues raised by this change include:
- In the situation where the Act provides a larger deduction than the Code for the previous year, does the shortfall leads to a retroactive downward adjustment to earnings computed on ITA principles given that Reg. 5907(2.03)(b) deems maximum deductions to have been claimed in prior taxation years?
- The requirement to shift to Canadian tax law retroactive to 2011 could mean that once the surplus has been recomputed, it will now be retroactively considered that dividends were paid in excess of available exempt surplus.
- Using Canadian tax law may trigger early recognition of income or gain for surplus purposes but without corresponding US tax; and subsequent US tax may be paid by a different FA and now be ignored in computing the first FA's surplus.
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "Earnings of Disregarded US LLC," Canadian Tax Highlights, Vol. 25, No. 2, February 2017, p. 5 under Reg. 5907(1) – earnings – (a)(iii).
CRA notes that a s. 7(8) deferred gain is triggered on a s. 73 rollover
A stock option benefit which was deferred under s. 7(8) on a stock option exercise before March 4, 2010 will be triggered on a disposition of the shares, even if this is as a rollover under s. 73(1.01)(b) of the shares to the taxpayer’s ex-spouse on a matrimonial settlement. The triggered s. 7 gain will add to the ACB of the rolled-over shares.
Neal Armstrong. Summary of 27 September 2016 Internal T.I. 2015-0572901I7 under s. 73(1.01)(b).
BC Trust – B.C. Supreme Court applies Fairmont to decline rectification relief
The trustees of Trust 1 determined not to distribute its 2012 trust income to Trust 2 (its sole beneficiary) based on CRA having designated the two trusts as one under s. 104(2). After the dispute was resolved by CRA agreeing to reverse the designation, the trustees were unsuccessful in obtaining a rectification order to declare that there could be a retroactive declaration by them of a 2012 income distribution. Weatherill J stated that “Fairmont Hotel…made clear that rectification is limited to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement.” He also declined to exercise the court’s inherent jurisdiction in this regard.
Rather oddly, he concluded with the statement:
[T]here is nothing prohibiting the Trustees from executing a trust minute in respect of the petitioner’s 2012 income allocation. A court order is not necessary. If the petitioner decides to do so, it will be up to the CRA to decide whether or not to give that allocation retroactive effect.
Neal Armstrong. Summary of BC Trust v. Canada (Attorney General), 2017 BCSC 209 under General Concepts – Rectification.
Income Tax Severed Letters 1 March 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Associated Newspapers – Court of Appeal of England and Wales finds that purchases made for promotional free on-supplies were part of the VAT-creditable overheads of a taxable business
A UK newspaper (ANL) paid VAT on its purchase of vouchers from Marks & Spencer and an intermediary, which it then provided free to those readers subscribing to its Sunday editions for the promotional period. HMRC argued that ANL was not entitled to recover any input tax on the vouchers because it had acquired the vouchers for on-supply at no consideration. Patten LJ found that there had been a sea change in the European VAT jurisprudence and that, now, the right way of looking at it was that the vouchers were part of the cost of promoting the taxable supply of ANL newspapers, so that any input tax was recoverable. He stated:
[I]n economic terms, the cost of purchasing the vouchers was…part of ANL's overall expenditure in the production and sale of its newspapers which the vouchers were intended to promote. The fact that the vouchers were provided free to buyers of the newspapers merely serves to confirm that they were cost components of the business rather than the onward supply of the vouchers.
The ETA has a specific regime dealing with gift certificates and vouchers (as well as with “free supplies.”) This case instead might be most relevant as shedding additional doubt on the CRA approach of emphasizing the “first order supply” for which an input has been acquired.
Neal Armstrong. Summary of Associated Newspapers Ltd v HM Revenue & Customs [2017] EWCA Civ 54 under ETA s. 141.02(1) – procurative extent.
Six full-text translations of French severed letters from August 2015 are now available
Full-text translations of six technical interpretations released in French on August 5 and 12, 2015 are now available - and are listed and briefly described in the table below.
These (and the other translations covering the last 19 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the "open" week for March.
Uber B.V. – Federal Court of Australia finds that an uberX driver was a taxi driver for GST purposes
The Australian GST Act requires that all enterprises supplying “taxi travel” (defined as “travel that involves transporting passengers, by taxi or limousine, for fares”) are required to register, even if they otherwise would qualify as being small suppliers (under $75,000 in annual turnover). Griffiths J found that an uberX driver was operating a “taxi” in the ordinary sense of the word and, thus, was required to register.
Although this issue has not been addressed by the Tax Court of Canada, the Quebec Superior Court was receptive to arguments that the small supplier exemption also is not available to Uber drivers in Quebec.
Neal Armstrong. Summary of Uber B.V. v Commissioner of Taxation [2017] FCA 110 under ETA s. 240(1.1).