News of Note
CRA response implies that pipeline transactions and the like should use an amalgamation rather than wind-up
Email this ContentA, who holds 50% of the (common) shares of Opco (having a nominal ACB and PUC), accomplishes a sale of a portion of his shares to the other 50% shareholder (B) by B rolling his shares into a wholly-owned Newco, Newco paying the cash purchase price with proceeds of a bank borrowing and then amalgamating with Opco.
CRA acknowledged that it was unlikely that s. 84(2) applied given that the amalgamation by itself would not produce a “winding-up, discontinuance or reorganization” of Opco’s business. However, it could not be clear on this point in the absence of more information, viz.:
information regarding the nature of the business carried on by Opco, the composition of the assets of Opco (for example, the level of liquidity), the magnitude of the surplus of the corporation or the time within which the loan from the financial institution and the note due to Mr. B would be repaid by Amalco.
CRA indicated, without much further comment, that whether s. 84.1 applied turned on the factual question whether there was arm’s-length dealing.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.12 under s. 84(2).
CRA contemplates that all of the business income earned by a corporation following a subscription for a separate class of discretionary dividend shares could be allocated to those shares
Opco has three holding-company shareholders, each holding a separate class of discretionary dividend common shares. Whereas the first two shareholders only invested a nominal amount for their shares on Opco’s incorporation, the third shareholder (HA) subscribed $50,000 for its shares at a time that the global safe income of Opco was $70,000. Two years later, when the global safe income had increased to $90,000, Opco paid a $35,000 dividend to HA.
CRA indicated that if the safe income generated in the two years up to the dividend was business income (rather than, for instance, being from the realization of gains that had already accrued at the time of HA’s share subscription), and making some surmises on the contribution of this safe income to the accrued capital gain on the shares of HA, “the amount of $20,000 would represent a separate taxable dividend pursuant to paragraph 55(5)(f) and would not be subject to subsection 55(2),” whereas if the purpose test in s. 55(2.1)(b) was satisfied, the balance of the dividend could be subject to s. 55(2).
Before referring to various conferral-of-benefit provisions, GAAR and the difficulties posed by discretionary dividend shares in a butterfly, CRA stated that it was “not intended to give our general approval for the use of discretionary dividend shares.”
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 13 under s. 55(2.1)(c).
CRA indicates whether dividends paid on non-participating prefs engage s. 55(2) is a question of fact
Respecting the payment of a non-participating dividend to a holding company on preferred shares whose paid-up capital and ACB equals their redemption amount, CRA indicated that “the hypothetical capital gain that would have been realized on a FMV disposition of [the] preferred shares immediately before the dividend…would be nil,” so that the dividend would not be considered to come out of safe income on hand. Since the safe income harbour was not available, whether s. 55(2.1)(b) applied was a question of fact.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 14 under s. 55(2.1)(c).
CRA is negative on using a stock dividend of nominal value discretionary shares to shift value to an affiliated company
An individual) holding Class A common shares of Opco with substantial safe income on hand (“SIOH”) and an undisclosed ACB, receives a stock dividend of Class B discretionary voting shares, which are voting, participating, bear discretionary dividends and are redeemable by Opco for $1 – and then transfers the Class B share to a new Holdco under s. 85(1). Opco then pays a $1M dividend to Holdco.
CRA noted that no safe income travelled with the Class B share’s transfer to Holdco and stated that “if all other conditions were satisfied, subsection 55(2) would apply in respect of the dividend of $1 million.”
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 15 under s. 55(2.1)(c).
CRA comments on the application of safe income on hand to dividends paid on estate freeze prefs
Opco declares and pays a dividend (at the fixed 8% rate specified in the share terms) on estate freeze preferred shares held by Holdco with a nominal ACB and which had “inherited” safe income on hand from the common shares for which they had been exchanged of $700,000. CRA noted that the SIOH that contributed to the hypothetical capital gain on these prefs could be greater or less than $700,000 due to the effect of previous dividends or post-freeze earnings and stated that the dividend would reduce any post-SIOH attributable to the prefs before it ate into whatever was the balance remaining of the $700,000 of SIOH.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 16 under s. 55(2.1)(c).
CRA indicates that FX gains or losses on pre-transition debts are not affected by an s. 111(4)(e) election made following an acquisition of control
Where a taxpayer with an elected functional currency (e.g., the USD) has an accrued FX loss on a debt obligation owing in another foreign currency (e.g., the euro), an s. 111(4)(e) election made following an acquisition of control of the taxpayer will not affect the FX gain which would be realized under s. 261(10) re a pre-transition debt, so that it is only changes in the euro/USD exchange rate occurring from the beginning of the taxpayer’s first "functional currency year" up to the acquisition of control that would be subject to ss. 111(4) and (12).
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 17 under s. 111(4)(e).
ONEnergy – Tax Court of Canada states obiter that services acquired long after the cessation of commercial activity may give rise to ITCs
A company (“Look”) sold all the assets of its business and then successfully sued its executives for having paid themselves inflated bonuses and option termination payments out of the sales proceeds. In finding that Look was not entitled to input tax credits for the GST on its related legal fees and, in particular, that the lawsuit was not brought “in connection with the…termination of a commercial activity” as per ETA s. 141.1(3)(a), C Miller J stated:
“[I]n connection with”… is a broad expression but does not…, even on a textual reading allow for the remotest of links, such as a link only arising by way of the “but for” test. …
[T]he cost of legal services to chase after directors, who the Appellant claims have absconded with its money, is a need that would have been fulfilled regardless of where the funds emanated from. …
He added this helpful (likely obiter) comment:
[T]his is not an issue of timing. For example, had the Board discovered two years after the [asset] sale that a competitor had wronged Look…and the Board commenced a lawsuit, I would see no difficulty in finding such litigation activity was connected with commercial activity, notwithstanding some considerable time had passed since the termination of the business. Similarly, if Look had to sue the purchaser of [its assets] long after the completion of the sale for breach of a confidentiality provision, again timing would not preclude a finding of a connection.
Neal Armstrong. Summary of ONEnergy Inc. v. The Queen, 2016 TCC 230 under ETA s. 141.1(3)(a).
Ingenious Media – UK Supreme Court finds that statutory exceptions to taxpayer confidentiality should be construed narrowly in light of the common law of confidentiality
A senior British tax official disclosed, in an “off the record” interview with some journalists, that the schemes of a particular promoter of film tax shelters had been generating large losses to the fisc, and they published this and other confidential information. HMRC argued that this disclosure was justified by a statutory provision which authorized a “disclosure … made for the purposes of a function” of HMRC, noting their “general desire to foster good relations with the media or to publicise HMRC’s views about elaborate tax avoidance schemes,” as well as to the possibility of getting tips from the journalists.
In rejecting HMRC’s position, Lord Toulson noted that under “the common law of confidentiality:”
where information of a personal or confidential nature is obtained or received in the exercise of a legal power or in furtherance of a public duty, the recipient will in general owe a duty to the person from whom it was received or to whom it relates not to use it for other purposes.
Under the “principle of legality,” this “fundamental right…cannot be overridden by general or ambiguous words,” as HMRC was trying to do here.
The same restrictive interpretive approach likely would be applied to ITA s. 241(4)(a), which authorizes the provision to any person of “information that can reasonably be regarded as necessary for the purposes of the administration or enforcement of this Act.”
Neal Armstrong. Summaries of Ingenious Media Holdings plc & Anor, R (on the application of) v Commissioners for HMRC [2016] UKSC 54 under s. 241(4)(a) and Statutory Intepretation - Principle of Legality.
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CRA effectively confirms that s. 119 does not provide relief from double taxation re non-TCP shares
S. 119 applies to the withholding tax on dividends on shares subject to the stop-loss rules in subsection 40(3.7) and provides a credit against the tax that was payable under s. 128.1(4) by virtue of the taxpayer’s departure from Canada. (See Shew.) CRA read the clear words of s. 119 and confirmed that, for it to apply, the shares (which were deemed to be disposed of) must have been taxable Canadian property continuously from the time of emigration.
Accordingly, double taxation can occur.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.18 under s. 119.