News of Note
Ellison v. Sandini – Full Federal Court of Australia decision suggests that it may be difficult to create a proprietary interest in a portion of a larger bloc of shares held by another person
Email this ContentAustralian Family Court orders, that were made by consent between Mr and Ms Ellison, required a corporation (“Sandini” - that was controlled by Mr Ellison) in its capacity of trustee of the Ellison family trust to forthwith transfer 2.1M shares of a public company to Ms Ellison. However, Ms Ellison instead got Sandini to transfer those shares to a company controlled by her. This busted rollover relief to Mr Ellison unless it could be considered that the beneficial ownership of those shares had already been transferred to her because of the consent orders.
Jagot J (speaking for the majority) found for the Commissioner (i.e., no rollover relief to Mr Ellison) partly on the basis of her doubts that there had been such a prior transfer (concluding that “the orders vested statutory rights and a beneficial interest of some kind in Ms Ellison but … I do not consider that interest can be characterised as beneficial ownership.”)
She started with the proposition that “if the original owner continues to enjoy rights to deal with the asset, including rights of disposal, then it could not be said that another entity is the beneficial owner of the asset, even if the other entity may have a beneficial interest in the asset.” The difficulty in this regard was that (subject to a glitch discussed below) Sandini held a total of 35M shares of the public company, so that it might be considered that even after the order it had the right to decide which out of that larger pool was the block of 2.1M shares to be transferred to Ms Ellison (or, as it turned out, to her company).
She made a guarded finding that a person could have a proprietary interest in a specified portion of a larger pool of fungible assets, stating:
[T]he weight of authority is that there can be a valid trust over a fungible pool of assets provided the assets and relevant proportions for the different beneficiaries are identified with sufficient certainty. … If, given the terms of the declaration and the nature of the property, the trustee is constituted as nothing more than a bare trustee on behalf of the beneficiary in respect of the beneficiary’s proportional interest, it may well be that there has been a change of ownership … . For this to be the case, however, the rights vested in the beneficiary must be capable of supporting the grant of equitable remedies the equivalent of ownership, including preventing the trustee from dealing in the relevant proportion of the asset pool other than in accordance with the beneficiary’s directions.
However, she went on to doubt that the 35M shares in issue were fungible, given that different shares could have different tax basis and in light of the alluring proposition that:
If all shares in the company are of the same class, there is but a single asset, being the issued share capital … [which] single asset cannot give rise to the capacity for selection which defines a fungible asset.
In Canada, it would seem backwards to consider that the nature of a property interest is determined by its tax treatment (see, e.g., ARTV) and CRA likely accepts that shares (as contrasted with partnership units) are distinct properties. Accordingly, it may be appropriate to skip over her fungibility doubts.
Now for the glitch. The relevant consent order was botched. Sandini, in fact, was not the trustee of the Ellison family trust. It was the trustee of a unit trust holding the 35M shares and of which the Ellison family trust (with a different corporate trustee) was the sole unitholder. Jagot J found that, given that the consent “orders are to be construed on their own terms without reference to extrinsic material” she had no equitable discretion to fix this, so that “on their own terns, the orders have no operation and cannot be enforced.” Thus, on this more emphatic ground, the order also did not effect any transfer of beneficial ownership to Ms Ellison.
Neal Armstrong. Summary of Ellison v Sandini Pty Ltd [2018] FCAFC 44 under General Concepts – Ownership, s. 248(1) – disposition, s. 73(1)(b) and General Concepts – Evidence.
CRA confirms that an arrangement which eliminates all risk of loss nonetheless “appears” not to be a synthetic disposition arrangement if there is decent upside participation
10 months after the formation by him of a small business corporation, A agrees with an arm’s length employee of the corporation to sell 1/3 of his shares to him for their fair market value on that agreement date, but with the transfer of ownership postponed for 14 months, in order that the two-year holding requirement in the qualified small business corporation definition can be satisfied.
CRA confirmed that if the sale price was fixed, this would likely qualify as a “synthetic disposition arrangement” (SDA), so that the shares would be deemed to be disposed of for their FMV at the time of making the agreement. However, if the agreement instead provided that the aggregate share price would be increased by 20% of the profits made during the 14-month period, “it appeared” that there would no longer be an SDA, i.e., although there still was no downside risk (other than credit risk, which was not discussed), the opportunity for gain was no longer substantially eliminated.
Neal Armstrong. Summary of 20 February 2018 External T.I. 2017-0727811E5 F under s. 248(1) – synthetic disposition arrangement – para. (b).
Ahlul-Bayt Centre – Federal Court of Appeal refuses to grant an injunction deferring revocation of charitable registration
CRA indicated to an Ottawa Islamic school (the “Centre”) that it would revoke the Centre’s charitable registration after 30 days by publishing a notice of intention to revoke (based on serious non-compliance). The Centre applied to the Court of Appeal for an order prohibiting publication of the revocation notice until a later date based on the timing of when the Minister disposed of its objection under s. 168(4) to the notice.
In dismissing the application for this order, Laskin JA found that the Centre had failed to establish one of the tests for issuing an injunction, namely, of irreparable harm from the revocation. He stated:
The evidence that significant numbers of parents would withdraw their children from the school within one or two months is … neither clear nor compelling.
… While the Centre asserts that “[t]he loss of tuition revenue and the reduction of the donor base for School related fundraising will make [the Centre] financially incapable of operating the School, leading to its closure,” it has not …provided its current budget or other supporting financial information. … Its financial statements for 2016 also show an excess of revenues over expenditures of $307,242. …
Neal Armstrong. Summary of Ahlul-Bayt Centre, Ottawa v. Canada (National Revenue), 2018 FCA 61 under s. 168(2)(b).
Pelletier – Court of Quebec finds that employer payment of the law society dues of a tribunal member was not a taxable benefit
Lapierre JCQ found that the payment of the Quebec Bar dues of a commissioner of the Quebec Employment Injury Board by his employer did not give rise to a taxable benefit. Lapierre JCQ distinguished Tremblay, where the payment by the Quebec government of the bar dues of a Crown employee gave rise to a taxable benefit, on the basis that the Crown attorney would have had to pay his dues personally if they had not been covered by his employer - so that the reimbursement enriched him.
Here the exercise by the commissioner of his adjudicator role did not require him to maintain his membership in the Barreau du Québec. The only reason why his dues were paid for him by his employer was a statutory requirement that he be a member of the bar.
Without this requirement, Mr. Pelletier would have had no need to maintain his professional status in order to exercise his employment. He could have instead, as in the case of judges, ceased to pay the dues, which brought him nothing to the extent that he did not act as a lawyer. … This is especially true given that Mr. Pelletier’s function was not subject to the authority of the Barreau du Québec … nor to the Code of Professional Conduct of Lawyers.
Neal Armstrong. Summary of Pelletier v. Agence du revenu du Québec, 2018 QCCQ 1655 under s. 6(1)(a).
Income Tax Severed Letters 4 April 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Bauer – Federal Court of Appeal finds that CRA could constitutionally issue a s. 231.2 requirement to the taxpayer’s bank during a Special Investigations review
The CRA special investigations division issued s. 231.2 requirements to two banks to get the taxpayer’s bank statements, and used these to assess him for over $5M a year in unreported business income. The taxpayer’s pleadings in the Tax Court included the assertion that, since he was under investigation at the time that the requirements were issued, the information thereby obtained was inadmissible as his s. 8 Charter rights had been infringed.
In confirming that the Tax Court had correctly struck out this pleading, Webb JA stated:
While using requirements under section 231.2 of the ITA to obtain information or documents after an investigation has commenced may result in that information or those documents not being admissible in a proceeding related to the prosecution of offences under section 239 of the ITA, it does not preclude that information or documents from being admissible in a Tax Court of Canada proceeding where the issue is the validity of an assessment issued under the ITA. …
[T]he CRA’s power to issue requirements under section 231.2 of the ITA to obtain information or documents that will be used for the administrative purpose of reassessing a taxpayer is not suspended by the commencement of an investigation.
Neal Armstrong. Summary of Bauer v. Canada, 2018 FCA 62 under s. 231.2(1).
Hébert – Tax Court of Canada finds that a corporation whose only activity was unsuccessful efforts to sell its remaining equipment was carrying on an active business
The market for the business of the taxpayer’s corporation (“Radio Progressive “) of selling and repairing radio telecommunication equipment had virtually disappeared by 2007, so that from that time on, it did not make any sales, and essentially its only activity related to the efforts of the taxpayer (Mr. Hébert) to sell off its remaining stock of equipment. It was dissolved in August 2011.
Ouimet J found that Radio Progressive qualified as a “small business corporation” at some point within the preceding 12 months, so that Mr. Hébert’s loss on its dissolution qualified as a business investment loss. Since the stock of unsold equipment (which was essentially its only asset) related to its previous commercial activity of selling (and repairing) such equipment, Mr. Hébert’s efforts to sell that stock represented the continued carrying-on of that business, notwithstanding that no sales resulted.
Neal Armstrong. Summary of Hébert v. The Queen, 2018 CCI 48 under s. 248(1) – small business corporation.
CRA rules that a terminal loss denied under s. 13(21.1)(a) can be used to bump the land elected amount
Subco has entered into an agreement for the sale to an arm’s length purchaser of a property containing parcels of land with accrued capital gains and buildings thereon with accrued terminal losses. Since its Parent has accrued losses, the property is spun-off to a Newco subsidiary of Parent in reliance on s. 55(3)(a), with Newco then wound-up under s. 88(1) so that the capital gains can be realized in Parent’s hands.
On the spin-off of the property by Subco to Newco, CRA indicated that the s. 13(21.1)(a) rule for denying a terminal loss was to be applied after applying s. 85(1) without regard to s. 13(21.1)(a). For example, suppose that a parcel of land had an ACB and FMV of $200 and $400, and that the accrued terminal loss on the building thereon was $50. Subco and Newco would designate an s. 85(1) agreed amount for the parcel of $250. S. 13(21.1)(a) then kicks in to deny the $50 terminal loss but also to reduce the deemed proceeds to Subco from $250 to $200. Insofar as Newco is concerned, the agreed amount is still $250, so that in effect the terminal loss is used to bump the land ACB to Newco (and ultimately to Parent) by $50.
The loss suspension rule in s. 13(21.2) would be irrelevant because the sale to the purchaser would occur shortly thereafter.
Another interesting feature is that a preliminary s. 86 reorg was effected through an exchange of the “old” common shares of Subco for newly created common shares (having more votes per shares) and preferred shares pursuant to a share exchange agreement rather than by virtue of articles of amendment changing the old shares into the new shares. In other words, a “dirty” s. 85 exchange mechanic was used, but no s. 85 election was made so that s. 86 applied instead.
Neal Armstrong. Summaries of 2016 Ruling 2016-0635101R3 under s. 13(21.1)(a), s. 55(3)(a) and s. 86(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for a French Technical Interpretation released in November 2013 and for five questions from the October 2013 APFF Roundtables, as fully translated by us.
These (and the other full-text translations covering the last 4 1/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for April.
Choice Properties is proposing to acquire CREIT with a choice of cash, or Choice units issued on a s. 132.2 merger
The proposed acquisition of CREIT (which is a closed-end REIT holding most of its properties directly or through subsidiary LPs) by Choice Properties - which is an Ontario open-end REIT holding a partial interest in a property-holding LP (Choice Properties LP) - would occur for aggregate consideration of approximately $1.7B in cash and Choice Properties units valued at around $2.1B. REIT unitholders would have a choice between receiving cash or Choice Properties units, subject to proration. Those unitholders whose election for units was accepted would participate in a s. 132.2 merger of CREIT into Choice Properties.
Resident CREIT unitholders whose units will be redeemed for cash by CREIT (funded with a loan from Choice Properties LP) will be indifferent to the quantum of capital gains distributions allocated to their cash redemption proceeds. Accordingly, CREIT will engage in transactions at the commencement of the Plan of Arrangement to deliberately trigger gains on units in subsidiary partnerships or perhaps land, in order to achieve a basis step-up. As with other such merger transactions, CREIT is seeking CRA permission to have short fiscal periods for its subsidiary LPs, so that those pre-merger gains realized at lower levels can still effectively be allocated to the cash-redeemed unitholders.
Another preliminary step is to amend the CREIT declaration of trust to make its units redeemable, having regard to the subsequent redemptions of its units for cash and on the s. 132.2 merger.
Neal Armstrong. Summary of Circular of Canadian REIT under Mergers & Acquisitions - REIT/Income Fund/LP Acquisitions – REIT Mergers.