News of Note
Lauria – Tax Court of Canada accepts that shares transferred 3 weeks prior to filing the IPO preliminary should be valued at a 40% “marketability” discount to the IPO value
Email this ContentOn April 1, 2006, the taxpayers, who were executives of Gluskin Sheff+Associates Inc. (“GS+A”) (but with less clout than the founders), sold a portion of their shares to newly established family trusts at a price that was approximately 4.8% of that at which those shares were sold under an initial public offering that closed on May 26, 2006, following the filing of the preliminary prospectus on April 18, 2006. The pricing for the sale to the trusts applied a formula that had been used in agreements under which they (and other executives) had purchased their shares from the founders a few years previously, namely, 1.0 times the weighted average base management fee revenues of GS+A for the three preceding years. Such purchase agreements gave the right to the Board to require them at any time to sell their shares back to other executives at an amount determined under the same formula.
The taxpayers did not provide a valuation expert. Pizzitelli J accepted the opinion of the Crown’s expert, who estimated the maintainable earnings of GS+A (including performance fees) and capitalized those earnings to arrive at an en bloc enterprise value for GS+A (which, perhaps not coincidentally, largely coincided with the IPO valuation), and then applied a 40% “marketability” discount (to effectively the IPO price) to reflect “the risks that the IPO may not take place or the market for the shares does not materialize, or there would be a failure to agree on price, or the worsening of market conditions or a change of heart by the Founders.” Pizzitelli J considered this discount to be eminently fair to the taxpayers given his finding that, on the valuation date (April 1, 2006), the prospects for a successful IPO were high (and of the founders requiring the taxpayers to sell their shares back at the formula price, quite fanciful). Accordingly, the gains realized on the taxpayers’ sales to the trusts were substantially increased pursuant to s. 69(1)(b).
The taxpayers were reassessed well beyond the normal reassessment period. In finding that this was justified based on carelessness or neglect, Pizzitelli J stated:
[T]he Appellants did not seek an independent valuation and cannot be said to have thoughtfully, deliberately and carefully considered whether the proposed IPO would affect the share price. In fact, the Appellants just seemed to ignore it, when in my opinion, having regard to their skills in and knowledge of the securities industry from working as executives for a wealth management firm and the multiple other circumstances or red flags that went up … they were clearly aware of the impact of the IPO’s value on their holdings.
Neal Armstrong. Summaries of Lauria v. The Queen, 2021 TCC 66 under General Concepts – FMV – shares and s. 152(4)(a)(i).
GST/HST Severed Letters June/July 2021
Income Tax Severed Letters 17 November 2021
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
McNeeley – Federal Court of Appeal applies the principle that the Act must prevail over an overlapping Regulation
A distribution to an employee under an employee benefit trust (EBP) is taxable under s. 6(1)(g) rather than being subject to the usual trust distribution rules in s. 107. On the other hand, various s. 107 rules are stated to apply to a prescribed trust described in Reg. 4800.1. A trust for employees, which held shares in a family-controlled company, made distributions to employees including family members. Their tax reporting relied on the trust being a prescribed trust, so that a capital gain was treated as being realized on the distribution pursuant to s. 107(2.1) (as a result of an s. 107(2.001) election), with that capital gain being allocated to the beneficiaries.
Webb JA and the Tax Court below treated that distribution as instead having been made by an EBP, so that the full value of the distribution was includible in the beneficiaries’ income under s. 6(1)(g). Webb JA noted that the trust satisfied the terms both of the EBP definition and the description of a prescribed trust. In finding that it was an EBP, he cited Oldman for the proposition that “[o]rdinarily … an Act of Parliament must prevail over inconsistent or conflicting subordinate legislation,” and then stated:
[S]ince the definition of a prescribed trust is set out in the Regulations, the paramountcy of the definition of an employee benefit plan in the Act must govern. Otherwise, the Act would be amended by the Regulations if an arrangement, such as the one in this appeal, is not an employee benefit plan as defined in the Act because it is also a prescribed trust as defined in the Regulations.
Neal Armstrong. Summaries of McNeeley v. Canada, 2021 FCA 218 under s. 248(1) – EBP and Statutory Interpretation – Regulations/Statutory Interpretation.
CRA is currently reviewing whether and when cryptocurrencies may not be foreign property
When asked whether it might apply the UK approach of treating the situs of cryptocurrencies as following the place of residence of the holder, CRA stated:
The question of where a cryptocurrency is located, deposited or held within the meaning of section 233.3 is currently under review by the CRA.
Neal Armstrong. Summary of 8 October 2021 APFF Financial Strategies and Instruments Roundtable, Q.11 under s. 233.3 – specified foreign property – (a).
CRA indicates that accrued income under a segregated fund is not a right or thing
In light of s. 138.1(1)(f), the taxable income of a related segregated fund trust is deemed for the purposes of computing the income of the trust and beneficiaries under ss. 104(6), (13) and (24) to have been payable in the year to the beneficiaries, with the allocation amongst them to be determined by reference to the terms and conditions of the policy. (There is a similar rule in s. 138.1(3) for capital gains.)
CRA made the point that this is tax law, not real law. In fact, the beneficiaries generally have no entitlement to enforce payment to them of the accruing income. In particular having regard to the CRA view that “to be a right or thing [under s. 70(2)] … the individual would have to be legally entitled to receive the amount at the time of the individual’s death (the right would have to exist)” CRA considered that even though an individual annuitant who died part way through the year was allocated the income that had been earned in the year up to the time of death on the T3 slip received by his executors, he had no legal entitlement to the allocated amounts. Hence, such income was not rights or things, so that it could not be included on a separate s. 70(2) return.
Neal Armstrong. Summary of 8 October 2021 APFF Financial Strategies and Instruments Roundtable, Q.10 under s. 138.1(1)(f).
We have translated over 1800 CRA interpretations
We have published a further 10 translations of CRA interpretation released in June 2006. Their descriptors and links appear below.
These are additions to our set of 1,806 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 15 1/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
H&R REIT is proposing a spin-off of Primaris REIT using the s. 107.4 rollover
In order to have a greater focus on industrial and residential properties and its US portfolio, H&R REIT (the “REIT”) is proposing to spin-off a newly formed unit trust (“Primaris REIT”), containing a portfolio focused more on Canadian retail and office properties, on a tax-free basis to its unitholders. The steps will entail forming Primaris REIT with nominal capitalization but with the same number of units as those for the REIT itself, making a nominal capital distribution of cash to a depositary for the REIT unitholders, and having that cash then used to purchase the Primaris REIT units.
The REIT will then make a “qualifying disposition” described in s. 107.4 (i.e., a gift) of the office/retail portfolio (packaged in subsidiary flow-through entities) to Primaris REIT. In addition to this transfer occurring on a s. 107.4 rollover basis, there will be a pro rata transfer of ACB from the REIT units to the Primaris REIT units, so that the ACB of the latter will increase from their nominal initial amount.
This Alberta arrangement is conditional on receipt of a CRA ruling.
Shortly after completion of the arrangement, some companies associated with the Healthcare of Ontario Pension Plan will contribute eight properties to Primaris REIT in consideration for $200M in cash and units of Primaris REIT, resulting in them ending up with a 26% equity interest. Because of some pension plan restrictions, some of the units issued to them may be “Series B” non-voting units rather than regular Series A units of Primaris REIT.
Neal Armstrong. Summary of 5 November 2021 Circular of H&R Real Estate Investment Trust (the “REIT”) regarding the spin-off of Primaris Real Estate Investment Trust (“Primaris REIT”) under Spin-Offs & Distributions – S. 107.4 Spin-offs.
CRA confirms that an RRSP or RRIF withdrawal has an immediate impact on tax on the cumulative excess
The 1% monthly tax under s. 204.2(2.1) is imposed on the “cumulative excess amount in respect of RRSPs” (the “cumulative excess”). A component of the cumulative excess is the individual’s “undeducted RRSP premiums,” which is reduced by the amount, if any, by which the total of all amounts received by the individual in the year and before the time out of or under, inter alia, an RRSP or RRIF and included in computing the individual’s income for the year exceeds the amount deducted under s. 60(l) in computing the individual’s income for the year.
CRA confirmed that this reduction occurs on a monthly basis, consistently with the monthly calculation of the tax. For example, if the annuitant made a withdrawal from the individual’s RRSP (or RRIF) in May (that was not recontributed so as to generate a s. 60(l) deduction), thereby eliminating the cumulative excess, no tax would be payable for May or thereafter, but the tax would still be payable for the prior months.
Neal Armstrong. Summary of APFF Financial Strategies and Instruments Roundtable, Q.9 under s. 204.2(1.2) - undeducted RRSP premiums – J.
CRA releases 2020 IFA Roundtable items
CRA has published under its severed letter program the official versions of the first five questions and answers at the 2020 IFA Roundtable. We discussed these items at the time, but for convenience of reference are providing the table below with links to the items and our summaries of them. Questions 6 and 7 continue to be available on our Roundtables page.