News of Note
CRA finds that the Canada-U.K. Treaty does not exempt shares deriving their value from Canadian oil and gas licences – even where the Canadian business is carried on “in” them
Email this ContentPara. 5(a) of the Canada-U.K. Treaty provides that shares may be taxed in Canada if they derive the greater part of their value from immovable property situated in Canada, or Canadian oil and gas licences. Para. 7 provides that for these purposes, immovable property does not include “any property (other than rental property) in which the business of the company was carried on.”
In an interpretation provided prior to the Alta Energy decision, CRA took the view that where a UK resident disposed of its shares of a Canadian subsidiary deriving most of their value from Canadian oil and gas licences, the gain was not exempted by para 7 having regard to the ‘or” which we bolded above.
Alta Energy appears to have effectively treated Canadian oil and gas licences as immovable property, so that the somewhat comparable exclusion under the Canada-Luxembourg Treaty for immovable property in which the company’s business was carried on was available. It is not at all clear that the specific dealing by the Canada-U.K. Treaty with oil and gas licences effectively deems them not to be immovable property. Accordingly, this interpretation is debatable.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.3 under Treaties – Income Tax Conventions – Art. 13.
CRA states that a Canadian resource royalty interest requires a right to “take production”
Para. (d) of the definition of a Canadian resource property (CRP) includes:
any right to a rental or royalty computed by reference to the amount or value of production from an oil or a gas well in Canada, or from a natural accumulation of petroleum, natural gas or a related hydrocarbon in Canada, if the payer of the rental or royalty has an interest in … the well or accumulation …. and 90% or more of the rental or royalty is payable out of, or from the proceeds of, the production from the well or accumulation.
When asked whether the above reference to the royalty payer thereof having an "interest in" the well or accumulation requires a real property interest rather than a mere contractual interest, or is a contractual interest sufficient? CRA responded that “an ‘interest’ in the well or accumulation … requires that the payer must have a right to take production from the well or accumulation” – which sounds like a real property interest, although CRA evidently considered it to be otiose to comment directly on this point.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.2 under s. 66(15) – para. (d).
Plains Midstream – Federal Court of Appeal finds that s. 16(1) can only apply to a debtor if it equally applies to the creditor
As part of a complex set of transactions, a predecessor of the taxpayer agreed to assume a $225M loan that was due in perhaps 43-years’ time and that was non-interest-bearing (except in the remote event of oil production from the Beaufort Sea) in consideration inter alia for the payment to it of $17.5 million by the debtor. The predecessor treated the $207.5M difference between these two amounts as an amount which, although conceded not to be interest in form, was interest in substance and therefore could be treated as being recharacterized as interest under s. 16(1): the economic substance of the situation, was that it received $17.5 million as the present value of $225 million.
Nadon JA confirmed the rejection by Hogan J of this argument given that it was clear that the $207.5M difference could not be reasonably regarded as interest to the creditor, stating:
[I]it is because interest is, by its nature, symmetrical that the Judge was correct in interpreting subsection 16(1) in the way that he did. In other words, an amount is not interest if it does not have the character of interest to both the recipient and the payor.
Neal Armstrong. Summaries of Plains Midstream Canada ULC v. Canada, 2019 FCA 57 under s. 16(1) and s. 20(1)(c).
CRA will only extend Daishowa beyond reforestation and reclamation obligations on a case-by-case basis
Daishowa found that reforestation obligations were an intrinsic factor that reduced the purchase value of the timber tenures rather than a "distinct existing liability" that was assumed by the purchaser as additional consideration for the purchase. CRA warned that this approach was portable to resource sector reclamation obligations, but not necessarily beyond that, stating:
… It is CRA’s position that reforestation obligations in the forest industry and reclamation obligations in the mining and oil and gas industries are generally embedded in the related tenures or rights, as they cannot usually be severed and would therefore depress the value. Furthermore, the CRA’s position does not generally extend to sales transactions outside the resource industries but we are willing to consider fact situations on a case by case basis. It remains our position that the Daishowa case does not apply where there is a distinct, existing liability, as opposed to an embedded obligation.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.1 under s. 13(21) - proceeds of disposition.
Villa Ste-Rose – Tax Court of Canada finds that interest and penalties on a late-filed GST return should be computed after netting rebate claims against the gross GST payable
A company that was not registered for GST purposes was required to self-assess itself under ETA s. 191(3) for GST on the fair market value of an assisted-living facility constructed on its behalf. It filed the required return in this regard 9 months’ late. With that return it also included rebate claims which were higher than the s. 191(3) tax. CRA accepted the GST payable and rebate amounts, but assessed interest and penalties under ss. 280 and 280.1, calculated on the gross GST amount, which it effectively treated as having been owing for the full 9-month period.
D’Auray J considered this approach to be unfair and anomalous, since if the company had instead lain in the grass and been assessed by CRA for the unreported GST, CRA would have been required under s. 296(2.1) to allow the (more than) offsetting unclaimed rebate amounts, so that no interest or late-fiing penalties could have been assessed by it. Furthermore, on her reading of s. 228(6), she considered that the same result obtained, i.e., under this rule as well, CRA was required net the rebate claims against the gross GST payable for interest and penalty purposes.
Neal Armstrong. Summaries of Villa Ste-Rose Inc. v. The Queen, 2019 CCI 60 under s. 228(6) and s. 296(2.1).
Income Tax Severed Letters 27 March 2019
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CAPREIT is accomplishing a reverse takeover of European Commercial REIT through an asset sale
European Commercial REIT (the “REIT”) is substantially expanding its size by purchasing a Netherlands subsidiary (“BV”) of CAPREIT (holding a portfolio of Netherlands rental residential properties) in consideration for having a subsidiary LP of the REIT issue exchangeable units to CAPREIT. As a result of this transaction, CAPREIT will hold over 80% of the consolidated equity of the REIT in the form of the exchangeable units, so that the transaction thus is akin to a reverse takeover of the REIT.
Nelal Armstrong. Summary of European Commercial REIT Circular under Other - Asset Purchases.
Newmont is proposing to acquire Goldcorp directly on a non-rollover basis for both ITA and IRC purposes
Newmont is proposing to acquire all the shares of Goldcorp pursuant to an Ontario Plan of Arrangement for consideration consisting of 0.3280 of a Newmont Share and US$0.02 in cash for each Goldcorp Share. This would be a direct acquisition, i.e., no Canadian Buyco, and no use of exchangeable shares. The acquisition would occur on a non-rollover basis for U.S. purposes, i.e., the cash boot is considered to be sufficient to bust the IRC s. 351 rollover.
Neal Armstrong. Summary of Goldcorp Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Direct Target Acquisitions.
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in April 2012 and (going somewhat out of sequence) April 2011. Their descriptors and links appear below.
These are additions to our set of 813 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for April.
Gladwin Realty – Tax Court of Canada finds that using the CDA and negative ACB rules to generate “over-integration” was abusive
The taxpayer, a private real estate corporation, rolled a property under s. 97(2) into a newly-formed LP, with the LP then distributing to the taxpayer an amount approximating its capital gain of roughly $24M realized on closing the sale of the property. Such distribution generated a negative ACB gain to the taxpayer of that rough amount under s. 40(3.1) and an addition to its capital dividend account of roughly $12M (as this occurred before a 2013 amendment that eliminated such additions). The taxpayer recognized a further $24M capital gain at the partnership year end, which increased its CDA by a further $12M to $24M. It then promptly paid a $24M capital dividend to its shareholder. Later in the same taxation year, it was permitted to generate a capital loss of $24M under s. 40(3.12) to offset the s. 40(3.1) capital gain previously recognized by it.
Hogan J confirmed CRA’s application of s. 245(2) to reduce the taxpayer’s CDA by ½ the amount of the s. 40(3.1) capital gain, thereby generating Part III tax unless an s. 184(3) election was made.
First, the CDA rule “was adopted to ensure that only one-half of a capital gain would be subject to income tax if the gain was realized indirectly by a private corporation,” whereas here there was “over-integration,” i.e., the taxpayer purported “to pay a capital dividend equal to the entire capital gain realized from the sale of the Property.”
Second, “the purpose and effect of subsection 40(3.1) are to dissuade taxpayers from extracting from a partnership on a tax-free basis funds in excess of their investment in the partnership” - and s. 40(3.1) “and the alleviating rule in subsection 40(3.12) were not enacted to encourage taxpayers to deliberately create offsetting gains and losses for the purpose of inflating their CDA.”
Before recognizing either of the two capital gains, the taxpayer was continued to the BVI in order to cease to be a Canadian-controlled private corporation and to not be subject to additional refundable taxes under s. 123.3. CRA did not challenge this planning.
Neal Armstrong. Summary of Gladwin Realty Corporation v. The Queen, 2019 TCC 62 under s. 245(4).