News of Note
It may be advantageous for a US purchaser to acquire IP in a hybrid transaction
Email this ContentWhere the principal asset of a Canadian start-up company is its intellectual property, it may be possible to use a hybrid transaction to reconcile a US acquiror’s desire to acquire such IP in an asset acquisition with the Canadian individual owners’ desire to sell shares.
- The Canadian target’s shareholders and the US acquiror enter into a share purchase agreement, resulting in the target losing its CCPC status and having a deemed year-end.
- The target transfers all its business to a wholly-owned Newco on a s. 85(1) rollover basis, except that the elected amount for the IP is its fair market value, thereby resulting in a capital gain that bears an effective tax rate of around 13.5% - and in an addition to the target’s capital dividend account (“CDA”), given inter alia that s. 251(5)(b) does not apply for the purposes of determining whether a corporation is a “private corporation.”
- The target increases the stated capital of its shares which, with the use of its CDA, permits the shares to be sold for their stepped-up adjusted cost base.
Where there is no significant recapture respecting the IP, the shareholders’ after-tax proceeds will approximate (and may exceed, where the target had non-capital losses) the after-tax proceeds that would have been realized on a plain vanilla share sale.
Neal Armstrong Summary of Kenneth Saddington and Jennifer Hanna, “Mergers and Acquisitions in the Light of the US Tax Changes,” 2018 Conference Report (Canadian Tax Foundation), 19:1-36 under s. 249(3.1).
Wiegers – Tax Court finds that it has no jurisdiction to order the renewal of a settlement offer
In rejecting the taxpayers’ request for an order requiring the Minister to make a settlement offer to the taxpayers consistent with that previously made (supposedly unbeknownst to the taxpayers) to other participants in the same gifting tax shelter, MacPhee J stated:
[I]t remains clear and obvious, upon a review of the jurisdiction of the Tax Court as listed at section 171 of ITA, I cannot force either the Minister nor the Respondent to remake an expired settlement offer to an appellant.
Neal Armstrong Summary of Wiegers v. The Queen, 2019 TCC 260 under s. 171(1).
CRA indicates that post-death appreciation in an RRSP could qualify for a s. 146(8.1) rollover
The deceased died with an RRSP valued at $250,000. Later in the year, when the RRSP had appreciated to $255,000, the property in the RRSP was transferred to an estate account. The executor paid $205,000 (including $5,000 respecting the appreciation in the RRSP) to the surviving spouse (Ms. Y), who contributed that amount to her RRSP. That amount was designated by the executor and Ms. Y on Form T2019 as a refund of premiums, so that the deceased Mr. X had a $50,000 inclusion in his terminal return.
CRA essentially accepted this treatment of the $5,000 of income, so that it could be eligible for treatment under the refund of premiums and s. 146(8.1) designation rules, and be rolled over into Ms. Y’s return. Similar rules applied to RRIFs.
Neal Armstrong. Summaries of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.12 under s. 146(8.1) and s. 146.3(6.1).
CRA finds that a USA stripped away voting control of a parent over its wholly-owned subs
All the shareholders of a corporation entered into a unanimous shareholders agreement (USA) that stripped away all the management powers of the board of the corporation, with all those powers instead exercised by majority vote of the shareholders. CRA accepted that included in the powers taken away from the corporation’s board under the USA was the right to exercise the voting rights attached to the shares of the wholly-owned subsidiaries of the corporation.
In CRA’s view, this then engaged ETA s. 128(4), which provides that for qualifying voting control purposes, a person is not considered to own shares if another person (other than a closely-related person) has voting rights over those shares described in similar terms to ITA s. 251(5)((b)(i), e.g., a “right under a contract … to control the voting rights attached to the share.” Since the corporation (which was not closely related to any of its shareholders) thus was deemed not to have voting control of its subsidiaries, they were not closely related to it.
Neal Armstrong. Summary of 18 March 2019 GST/HST Interpretation 186839 under ETA s. 128(4).
Finance proposes to extend the principal residence exemption to an inter vivos disability trust
Beginning after 2016, eligibility for the principal residence exemption was limited to three categories of trusts, including a qualified disability trust that was a testamentary trust - so that an inter vivos trust established for the benefit of an individual eligible for the disability tax credit (DTC) was excluded. Finance has now provided a comfort letter recommending, effective for taxation years beginning after 2016, that the principal residence exemption be amended to also accommodate an inter vivos trust for a resident child, or present or previous spouse, of the settlor, where that beneficiary is eligible for the DTC and, during his or her lifetime, no other person can obtain the use of the trust income or capital.
Neal Armstrong. Summary of 4 September 2019 Finance comfort letter under s. 54 – principal residence – (c.1)(iii.1)(B).
Finance provides comfort letter opening up statute-barred years for additional s. 20(1)(v) deductions
The Mining Association of Canada suggested that it was inappropriate for taxpayers, who had been provincially reassessed for additional mining taxes to lose the additional s. 20(1)(v) deduction because the reassessed years were now statute-barred. Finance has provided a comfort letter recommending (retroactive to taxation years that end after 2007):
that a deduction for mining taxes be allowed for the taxation year in which the mining taxes are paid if the mining taxes paid are in respect of income from mining operations that were carried on in a prior taxation year of the taxpayer that is barred from reassessment under the Act.
Neal Armstrong. Summary of 3 September 2019 Finance comfort letter under s. 20(1)(v).
CRA is refusing requests for Canadian branches of foreign FIs to register for GST/HST purposes
A Canadian branch of a foreign financial institution that has imported taxable supplies potentially may reduce its compliance burden (i.e., less frequent returns and payments – but with the potential to then be required to file an annual information return) if it voluntarily registers for GST/HST purposes.
However, the CRA is increasingly refusing such applications; its reason is that the existence of a Canadian branch does not make the financial institution a Canadian resident for GST/HST purposes. …
This is puzzling since ETA s. 132(2) provides that a non-resident person with a permanent establishment in Canada is considered to be resident in Canada in respect of the person's activities carried on through that establishment.
Neal Armstrong. Summary of Andrew Linton and Jillian Adams, “CRA Denies Voluntary GST/HST Registration for Financial Institutions,” Canadian Tax Focus, Vol. 9, No. 4, November 2019, p. 7 under ETA s. 240(3).
CRA finds that a fee paid for taking a financing from signing through to closing bears GST/HST
A lender retained another company in acting as its agent in doing due diligence on the borrower, with whom it had signed a credit agreement but not yet made the loan, and in managing the process through to the closing of the agreement. In finding that a non-refundable up-front fee paid by the borrower to the agent was for a taxable service under the para. (r.4) exclusion from the financial service definition (re the provision of a service preparatory to a listed financial service) rather than being an exempted “arranging for” financial service, CRA stated:
As part of the due diligence for underwriting the transaction, [the loan agent] engages an independent engineer and an insurance consultant to prepare their third-party reports, completes a financial model, prepares a confidential information memorandum for a potential lender, prepares credit documentation with its legal counsel, and arranges for the closing and the funding of the project. The predominant nature of the service … is preparatory in nature to the … potential provision of a financial service, that is, the lending … .
In light of the italicized passage, this ruling arguably is inconsistent with the Global Cash Access line of cases, which finds there to be an exempt financial service if that was what predominantly was being paid for, even if the fee recipient was also doing substantial work to that end.
CRA also ruled that a fee paid to the loan agent by another lender was a taxable loan-management under the para. (r.3) exclusion from “financial service.”
Neal Armstrong. Summaries of 2 May 2019 GST/HST Ruling 150998 under ETA s. 123(1) – financial service – para. (r.4), para. (r.3).
CRA income tax severed letters schedule for tomorrow and the holiday season
There will be three deviations from the usual Wednesday-morning release schedule of the Income Tax Rulings Directorate:
- Letters will not be released tomorrow.
- Letters will come on December 23rd, not the 25th.
- Letters will come on the December 30th, not the 31st.
Chen – Federal Court accepts CRA suggestion of filing a T1135 with estimates to avoid late-filing penalty
After finding that it was reasonable for CRA to decline penalty relief to the taxpayer for filing a T1135 form seven weeks late (along with her regular return, which did not attract a penalty because there was no tax owing) given that she had done the same thing a year previously, McVeigh J turned to one of the taxpayer’s excuses, which was that she had been in another city from February to May 2016, and essentially accepted CRA’s comment that the taxpayer “could have instead filed an estimated 2015 Form T1135 and then amended it once she had her documents.”
Neal Armstrong. Summary of Chen v. Canada (Attorney General), 2019 FC 1435 under s. 220(3.1).