News of Note
Income Tax Severed Letters 2 January 2019
Email this ContentThis 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).
7 further translations of APFF Roundtable questions are available
These days you just can’t get staff to work on Christmas. Nonetheless, we have released another 7 full-test translations of APFF Roundtable items. These consist of the final 5 items from the 2018 APFF Financial Strategies and Instruments Roundtable and 2 items from the 2012 APFF Roundtables.
These are additions to our set of 740 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 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 January.
CRA recognizes due diligence defence to paper-filing penalty
S. 162(7.3) imposes a per-return penalty for tax preparers who do not file electronically. CRA recognizes that a due diligence defence is available. For example, respecting the potentially-conflicting requirement that the return not be filed electronically without a signed T183, CRA referred to the situation where:
a return is due for an individual who lacks competency to sign, and over whom no one has Power of Attorney (for example, a child or spouse looking after a parent or spouse’s affairs on an informal basis, or a deceased taxpayer where no Executor or Administrator has been legally appointed).
Neal Armstrong. Summary of May 2017 CPA Alberta Roundtable, ITA Q.8 under s. 162(7.3).
CRA confirms that it can issue a clearance certificate before a corporate dissolution
Where there are multiple legal representatives, e.g., executors or directors, CRA will issue a single s. 159(2) certificate to the person whose name first appears on the request for the certificate, but will include the names of all the other legal representatives on that certificate - and, if more than one address is provided, send a copy of the certificate to the other addresses. CRA also stated:
There is no requirement for a corporation to be dissolved prior to the request of a clearance certificate. The CRA can issue a partial clearance certificate if the articles of dissolution are pending closure or we believe the intent is to dissolve the corporation.
No response was given to the suggestion that corporate directors are not legal representatives during the corporation’s existence.
Neal Armstrong. Summary of May 2017 CPA Alberta Roundtable, ITA Q.7 under s. 159(2).
CRA indicates that the construction of a pipeline can qualify for the GST/HST joint venture election
The Joint Venture (GST/HST) Regulations provide that “the construction of real property … including … development activities” is eligible for the joint venture election. CRA indicated that the construction of a pipeline likely would so qualify “to the extent that it is affixed to the ground and intended to remain there on a permanent basis.”
Neal Armstrong. Summary of May 2017 CPA Alberta Roundtable, GST/HST Q.3 under Joint Venture (GST/HST) Regulations, s. 3(a).
CRA confirms that it usually does not assess the recipient for GST/HST
In response to a suggestion that CRA is starting to use s. 296(1)(b) to assess the recipient of taxable supplies (rather than the supplier) outside of an insolvency context, CRA confirmed that it “generally” will not assess the recipient, but may do so “in circumstances of potential revenue loss,” and that its “usual practice … is to look to the supplier.”
Neal Armstrong. Summary of May 2017 CPA Alberta Roundtable, GST/HST Q.2 under ETA s. 296(1)(b).