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Thomson Reuters distributed US$2.3 billion in cash pursuant to a s. 86 reorg with opt-out rights

On November 27, 2018, Thomson Reuters distributed US$2.3 billion to its shareholders (being a portion of the US$17 billion realized earlier in the year on an asset sale), using a s. 86 distribution. In order to avoid potentially adverse tax consequences for some shareholders in foreign jurisdictions, Thomson Reuters gave non-exempt shareholders in non-Canadian jurisdictions the right to opt out of the cash distribution so that, rather than receiving such cash, their percentage equity interest in the Corporation would increase by an appropriate amount.

To accomplish this result, the “Participating Shareholders” (i.e., those who did not elect to be “Opting Out Shareholders”) had each of their old common shares exchanged under a s. 86 reorg for US$4.45 of cash and 0.9070 of a new common share, whose attributes were the same as for an old common share, except that it was convertible on a one-for-one basis for an old common share. All their new common shares were then converted into old common shares. The Opting Out Shareholders continued to hold the same number of old common shares as before. Given the paid-up capital per old common share of C$13.36 per share, no deemed dividend arose.

This “Return of Capital Transaction” was effected pursuant to on Ontario Plan of Arrangement, whose terms effectively indicate that the Corporation is potentially willing to entertain letting Participating Shareholders elect under s. 85(1) or (2) respecting the above exchange.

Neal Armstrong. Summary of Thomson Reuters Circular and Press Release under Spin-offs & Distributions – S. 86 cash distributions.

Walsh – Federal Court of Appeal confirms denial of interest relief for a taxpayer who held off paying an assessment pending the resolution of a similar (departure trade) case

In 1998, the taxpayer implemented a “departure trade transaction” under which he borrowed $695 million from CIBC so as to generate an interest deduction for the period prior to his departure from Canada, with that money simultaneously being reinvested with CIBC – but with the return thereon not being taxable to him prior to his departure due to the reinvestment occurring “through” intermediate Caymans companies who issued preferred shares rather than debt to him.

In 2002, his 1998 return was reassessed to deny his $47 million interest deduction and to increase the reported capital gain arising under s. 128.1(4). In May 2006, his 1999 return was reassessed to add $54 million of income based on the in-the-alternative view that he had not ceased to be a Canadian resident in 1998 – which, of course, was inconsistent with the earlier reassessment of the departure tax for that year. In June 2006, a similar departure trade case (Grant – subsequently affirmed), denied the interest deduction. In a 2010 settlement, the appellant accepted the denial of the interest.

Near JA affirmed the decision below that the decision of the Minister’s delegate to deny relief of the assessed interest had not been established to be unreasonable, noting that:

Telfer stated that a taxpayer who knowingly fails to pay a tax debt pending a decision in a related case “normally cannot complain that they should not have to pay interest” … .

He also indicated that the inconsistent reassessment did not preclude the taxpayer from taking steps to reduce his interest exposure (and that the taxpayer had been slow in providing CRA with information to sort out when he had ceased to be a Canadian resident).

Neal Armstrong. Summary of Walsh v. Canada (Attorney General), 2018 FCA 229 under s. 220(2.1).

Ihama-Anthony – Tax Court of Canada indicates that an objection can be made after the proposal letter and before the notice of reassessment – but must state “I object”

Sommerfeldt J found that a fax sent by the taxpayer to CRA could have qualified as notices of objection even though it may have been sent before the issuance of the notices of reassessment in question, stating:

Like Justice Woods in Persaud, I am of the view that a notice of objection prepared in response to a proposal letter, which informs a taxpayer that a reassessment is about to be issued, may, if validly served on a Chief of Appeals, constitute a valid notice of objection in respect of the reassessment when it is subsequently issued.

However, the fax in question did not so qualify because it was not addressed to the Chief of Appeals, and did not state “I object to the expense disallowance” or words to that effect, and instead only provided missing documents.

Neal Armstrong. Summaries of Ihama-Anthony v. The Queen, 2018 TCC 262 under s. 165(1) and s. 166.2(5)(a).

Loblaw Financial – Tax Court of Canada finds that the Crown should not receive a costs award

CRA prevailed in assessing a Loblaw subsidiary for the realization of $473 million of foreign accrual property income between 2001 and 2010 through a wholly-owned Barbados international bank (GBL), but only on the basis that GBL’s business was not conducted principally with arm’s length persons. The taxpayer had made a settlement offer on what C Miller J had described as a principled basis, namely, that CRA would apply GAAR to GBL’s 2006 to 2013 years – but not to the earlier years on the basis that they were not covered by waivers provided. CRA rejected this offer and made its own offer (which was made too close to trial to qualify under Rule 147(3.2), and was also rejected) that provided a concession on the characterization of foreign exchange gains and losses realized by GBL

C Miller J found that no costs should be awarded to CRA, notwithstanding its total success, since it had lost on most of the issues raised by it. Respecting CRA’s submission that it should receive an award of 30% of solicitor-client costs incurred after its counteroffer, he agreed (at para. 19) with the taxpayer that this offer “was neither a compromise nor a good faith attempt to settle, given the relative insignificance of the [FX] issue.”

Neal Armstrong. Summary of Loblaw Financial Holdings Inc. v. The Queen, 2018 TCC 263 under Tax Court Rules, Rule 147(3).

CRA requires that a transfer of an FA with exempt earnings by FA Holdco to Can Subco occur at less than the shares’ FMV

A foreign affiliate (New FA) of a Canadian corporation (ACo) transferred all the shares of FA1 to a Canadian-resident subsidiary (BCo) of ACo in consideration for a note of BCo whose amount equalled the sum of the relevant cost base of the FA1 shares and the net surplus (being exempt surplus) of FA1 (such sum, the “Transfer Amount”). BCo then used share subscription proceeds received by it from ACo to repay the note, with New FA then distributing that cash to ACo and with ACo electing under Reg. 5901(2)(b) for the distributions to come out of New FA’s pre-acquisition surplus. CRA ruled inter alia as to the application of s. 93(1.11) to effectively convert part or all of the capital gain of New FA otherwise realized on its disposition of its FA1 shares into an exempt surplus dividend.

The ruling letter states:

The purpose for the transfer by New FA of its FA1 Shares to BCo … occurring at the Transfer Amount as opposed to occurring at their FMV, was not to confer a benefit on a person, but rather to address certain policy concerns of the CRA by restricting BCo’s aggregate ACB of its FA1 Shares to the Transfer Amount.

Having insisted that the transfer of the FA1 shares by New FA to BCo occur at the Transfer Amount rather than the higher FMV, CRA obligingly issued rulings that none of the usual conferral-of-benefit provisions applied.

Neal Armstrong. Summaries of 2016 Ruling 2016-0630761R3 under s. 93(1.11) and Reg. 5901(2)(b).

Income Tax Severed Letters 2 January 2019

This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Acquisition of Agellan REIT entails planning to realize accrued gain on cross-border USD loans

It is proposed that an Ontario LP within the Elad group (the “Purchaser”) will acquire all the units of Agellan REIT for cash under a plan of arrangement. The REIT holds U.S.-dollar notes of a U.S. subsidiary with an accrued FX gain. In order for this gain to be realized in the hands of the current unitholders, the Purchaser will lend the requisite funds to Agellan U.S. subsidiaries, with the funds being used by them to repay the USD debt owing to the REIT, with the REIT then lending the money back to the Purchaser. The resulting FX capital gain to the REIT will then be distributed to the REIT unitholders through a special distribution, that will be paid in kind though the issuance of REIT units. There is no prejudice to the resident (as contrasted to the non-resident) unitholders in this, as this distributed capital gain reduces the capital gain realized by them on the immediately following sale to the Purchaser.

In order to produce greater precision and control respecting the application of the rules associated with a loss restriction event, one of the plan of arrangement steps entails the issuance by the Canadian holding company (through which the REIT holds the U.S. structure) of a super special voting share to the Purchaser.

The REIT sold its last major Canadian real estate asset earlier in 2018, and distributed the resulting gain to its unitholders on December 31, 2018 through the issuance of further REIT units, immediately followed by a unit consolidation. The non-resident withholding tax will be handled in a manner that results in the non-resident unitholders holding fewer REIT units than they would had they been residents. The 2018 sale of the Canadian property is expected to result in the REIT not qualifying as a REIT for ITA purposes in 2019, but this is not expected to be problematic as at that point virtually all of its property will be non-portfolio property.

Neal Armstrong. Summary of Agellan Commercial REIT Circular under Mergers & Acquisitions –REIT/Income Fund/ LP Acquisitions - LP Acquisitions of Trusts.

The consideration for the proposed Pan American acquisition of Tahoe includes future contingent Pan American share deliveries

Under the proposed acquisition of Tahoe Resources by Pan American Silver pursuant to a B.C. Plan of Arrangement, Tahoe shareholders would be provided with a choice between, for each Tahoe share held, US$3.40 in cash or 0.2403 of a Pan American common share, subject to proration based on a maximum cash and share consideration of US$275M and 56M Pan American share, respectively. In addition, Tahoe shareholders will receive, for each Tahoe Share, one contingent value right (a “CVR”), that will represent the right to the automatic delivery of 0.0497 of a Pan American treasury share payable upon first commercial shipment of concentrate following restart of operations at Tahoe’s Escobal mine in Guatemala, provided this occurs within 10 years. Each CVR has an implied value of US$0.70 (US$221M in total). Tahoe Shareholders will own approximately 27% of Pan American, or 32% upon delivery under the CVRs.

Taxable resident shareholders are permitted to elect under s. 85. Because the right to receive Pan American shares under the CVRs is not absolute, the CVRs are considered to represent “boot” rather than share consideration for s. 85 election purposes. The cost of a Pan American share received under a CVR is considered to be equal to the FMV of a CVR received under the Plan of Arrangement.

Pan American will drop all of its Tahoe shares into a Newco as part of the Plan of Arrangement, and then Tahoe will be merged into Newco under the Plan of Arrangement with the same effect as an amalgamation except that Newco will be the sole survivor of the amalgamation (see 2006-0178571R3). The U.S. tax disclosure treats the Arrangement as a “D” reorg, The CVRs are likely just deferred share consideration.

Neal Armstrong. Summary of Tahoe Resources Circular under Mergers & Acquisitions – Mergers – Shares for CVRs, and Shares or Cash.

CRA indicates that a non-registrant vending an exempt business can make a s. 167 election on the vended real estate

Why does a non-registrant selling a complete business to a single buyer need to make an s. 167 election, given that the sale of all tangible and intangible personal property of a non-registrant used exclusively in an exempt business would be exempt per ETA s. 141.1(1)(b) and “since the election does not cover the sale of real property,” there seems to be no instance where the election serves any purpose. CRA responded:

Paragraph 141.1(1)(b) does not include sales of real property. In cases where a non- registrant person engaged exclusively in exempt activities makes a supply of a business and taxable real property is included in the agreement for the supply, the person would, subject to section 167, be able to make an election in respect of the supply (including the real property) as long as the recipient is a registrant.

Although this response is technically correct, the question still stands. S. 167(1.1)(b)(i) deems the elected-upon real estate to have been acquired by the recipient for use exclusively in commercial activities, so that if, in fact, the real estate continues to be used in making exempt supplies, it will be subject to GST/HST under the change-of-use rules.

Neal Armstrong. Summary of May 2017 CPA Alberta Roundtable, GST/HST Q.9 under s. 167(1).

CRA generally will accept a late ETA s. 156 substantively-available election if the parties have been treating themselves as subject to it

When asked when it will accept a late-filed ETA s. 156 nil consideration election (on form RC4616), CRA responded:

CRA normally accepts these when the registrant is eligible, compliant and there is some sort of evidence that the registrant has been applying these rules consistently. This evidence could be a note in the file that says election GST25 [the former s. 156 election form] in use.

Neal Armstrong. Summary of May 2017 Alberta CPA Roundtable, GST/HST Q.5 under ETA s. 156(4)(b)(ii).