News of Note
Wagner - Tax Court finds parties did not deal at arm's length because they worked together to share a tax benefit
Email this ContentThe three shareholders of a corporation, which had entered into an asset sale agreement, then arranged to restructure the agreement as a share sale in which a substantial portion of the aggregate consideration was paid to them individually as a non-compete payment (which, given that draft s. 56.4 had not yet been introduced, they expected to receive free of tax). They paid a share of their targeted tax savings to the purchaser.
Favreau J. found that the parties' allocation agreement was not an arm's length transaction, because they were "working together and had a common interest, that is, that of minimizing as much as possible the tax consequences of the transaction and to divide among them the tax saving on the projected income." All the amounts the vendors received were share sale proceeds, and they got no deduction as a disposition expense for their payment of some of the targeted tax savings.
This case illustrates that purchase price allocations will be given scant weight if they are unreasonable and the parties were not adverse in interest with respect to the allocation.
Neal Armstrong. Summaries of Wagner v. The Queen, 2012 TCC 8 at s. 68 and s. 251(1)(c).
Canada Safeway - Alberta Court of Appeal finds that the Alberta GAAR does not apply to a further provincial income-shifting transaction
This case is quite similar to Husky. Hunt JA stated that "a taxpayer is free to replace retained earnings with borrowed money," and rejected a submission of Alberta that "when a series of transactions ... is tax-motivated, every transaction comprising the series is an ‘avoidance transaction’."
Neal Armstrong. Summary of Canada Safeway v. Alberta, 2012 ABCA 232 under s. 245(4) and s. 245(3).
WesternOne Equity Income Fund proposes conversion to public company
WesternOne Equity Income Fund is proposing its conversion to a public company under a Plan of Arrangement pursuant to which the unitholders will exchange their units of the Fund for shares of a new CBCA corporation, and the Fund and the subsidiary trust of the Fund will be wound up.
Somewhat unusually, the Circular for the conversion also provides for the adoption of a unitholders' rights plan. The rights issued under this plan are all cancelled as a preliminary step in the Plan of Arrangement - then following the termination of the Fund, the rights plan is deemed under the Plan of Arrangement to have been amended so that it applies to the new public company. (The rollover in s. 85.(8) would not apply if the unitholders received rights under the rights plan as part of the consideration for their Fund units.)
As the s. 85.1(8) rollover expires at year end there may be more of these transactions.
Neal Armstrong. See summary of WesternOne Circular for conversion to a public company.
Husky Energy - Alberta Court of Appeal found that there was no abuse in exploiting the absence of group taxation in Canada
The Alberta general anti-avoidance rule (which was essentially identical to the federal GAAR) was not engaged when Alberta corporations reduced their income by paying interest to a hybrid affiliate (having a British Virgin Islands incorporation but residency in Ontario for Ontario corporate tax purposes) which was effectively exempt from Ontario corporate tax on that interest - but with the affiliate using the non-taxed funds received by it to pay dividends back to Alberta which were eligible for the inter-corporate dividend deduction. The central thrust of the Court's reasoning appears to be that it is fundamental to the policy of the Alberta (and Canadian) tax system that each corporation is a separate taxpayer, and this "principle of non-consolidation supports the view that abuse of [the interest deduction in] section 20(1)(c) cannot be clearly established based on the tax treatment of a related company in another province."
This suggests that where inter-provincial loss-shifting transactions are not precluded by more specific rules, the provincial GAAR rules also do not prevent the migration of losses to provinces where the losses are more valuable.
Neal Armstrong. Summary of Husky Energy v. Alberta, 2012 ABCA 231 under s. 245(4).
Craig - Supreme Court of Canada overrules Moldowan for not adhering sufficiently to the precise wording of the farming loss rule
The Supreme Court in a unanimous decision has indicated that its previous decision in Moldowan should not be followed. Accordingly, a lawyer could deduct all the losses from his "farming" (horse racing) operation notwithstanding that his law practice was his chief source of income. All that was required in the wording of the farming loss restriction rule in s. 31 was that a combination of his law practice and horse operation be his chief source of income, and this test would be satisfied if (as was found on the facts) he devoted significant time and resources to his horses.
Although Rothstein J stated that the Court must have "compelling reasons that the precedent was wrongly decided" before overruling that precedent, this in fact is the third time that the Supreme Court has effectively departed from tax interpretations of Dickson CJ (i.e., Singleton and to some extent Ludco effectively not following Bronfman Trust; and Stewart and Walls not following the reasonable expectation of profit doctrine first enunciated in Moldowan).
For those without farming losses, the biggest significance of this case may be that it indicates that, notwithstanding turnover in its membership, the Supreme Court still considers that tax interpretation should be strongly grounded in the precise wording of the statutory provisions at issue.
Neal Armstrong. Summaries of Craig v. The Queen, 2012 SCC 43 under s. 31(1) and General Concepts - Stare Decisis.
Energy Fuels will not withhold on commodity-linked interest payments to qualifying US residents to the extent of the minimum interest payments of 8.5%
Energy Fuels has issued convertible debentures whose interest rate in each semi-annual period is between 8.5% and 13.5% depending on the uranium price. In the case of US residents entitled to Treaty benefits, Energy Fuels will only be withholding (at 15%) on the amount of the interest payments over the 8.5% minimum.
Neal Armstrong. See summary of Prospectus for Energy Fuels convertible debenture offering.
Tele-Mobile - Tax Court finds that "coupon" has a broad HST/GST meaning - but not broad enough to cover automatic discounts
After finding that the provision of what he characterized as "straightforward discount[s]" by Tele-Mobile did not entitle it to input tax credits under the coupon rules (s. 181(3)) or the rebate rules (s. 181.1), Campbell Miller J. went on to indicate obiter that a coupon could qualify as such even if it were only delivered electronically; and that a qualifying coupon can be for several fixed amounts, such as a different discount for a 1-year, 2-year or 3-year cellphone plan.
Scott Armstrong. Summaries of Tele-Mobile Company Partnership v. The Queen, 2012 TCC 256 under ETA s. 181(1), s. 181(3), and s. 181.1.
CRA confirms the inability of a top-tier partner to elect to reverse a negative ACB gain
Where a corporation, individual or testamentary trust realizes a capital gain on a limited partnership interest (or passive "specified member" interest) under the negative adjusted cost base rule in s. 40(3.1), the rule in s. 40(3.12) permits that partner to realize a capital loss at the end of the next fiscal period of the partnership to the extent that the adjusted cost base of the partnership interest has become a positive amount.
CRA has confirmed that this loss recognition election is not available where the limited partner (or specifed member) is itself a partnership. This represents another loss-utilization anomaly of two-tier partnership structures (see also the post below on the limited partnership loss rules).
Neal Armstrong. Summary of 3 July 2012 T.I 2012-0449701E5 under s. 40(3.12).
Daruwala - Tax Court finds an informal oral occupancy arrangement to be a "licence or similar arrangement"
Woods J. found that an informal arrangement between the corporate builder of a home and its individual shareholder under which the individual and his family were given temporary occupancy pending a sale of the home a number of months later, qualified as a "lease, licence or similar arrangement" of the home as "a place of residence" - so that the GST self-supply rule in s. 191(1)(b)(i) was triggered. As a result, the appellants are entitled to a rebate of the GST that had been charged to them by the builder - and the builder may now face an unbargained-for GST assessment.
This finding of an oral "licence or similar arrangement" has broader significance, as the quoted phrase appears in a number of other HST/GST provisions.
Neal Armstrong. Summary of Daruwala v. The Queen, 2012 TCC 257 under ETA, s. 191(1).
CRA supports broad interpretation of the copyright royalty exemption from Part XIII tax
CRA has indicated that it considers the s. 212(1)(d)(vi) exemption from Part XIII withholding tax to encompass any copyright royalties paid in respect of a work (other than film, which is excluded under s. 212(5)). It appears to be inherent in this view that the words "production or reproduction" in s. 212(1)(d)(vi) have a broader meaning than their more specialized meaning in copyright law. As found in ESA v. SOCAN, s. 3(1) of the Copyright Act distinguishes between reproduction and performance rights, so that copyright royalties paid in respect of performance rights are not considered to be in respect of production or reproduction rights.
Scott Armstrong. Summary of 3 May 2011 IFA Roundtable 2011-0404511C6 under s. 212(1)(d)(vi).