News of Note
The treatment of share-sale earnout payments that do not come within IT-426R is uncertain
Email this ContentHaving regard to the reference to “the” property in s. 12(1)(g) and the background to its introduction, it is quite arguable that the property referenced in s. 12(1)(g) is only the property that was sold, so that sales proceeds of sold shares or partnership interests that are based only on parameters for use of the underlying property of the sold corporation or partnership do not come within the scope of application of s. 12(1)(g) (thereby suggesting that it might be unnecessary to fit within the safe harbour for earnouts in IT-426R). However, s. 12(l)(g) notably is not stated to be limited to circumstances in which property is sold, notwithstanding the fact that the original impetus for the provision came from a case involving the retention of a royalty in connection with a sale of property.
Neal Armstrong. Summaries of Warren Pashkowich and Daniel Bellefontaine, “Participation-Based Payments: What Are They and How are They Taxed,” 2017 Conference Report (Canadian Tax Foundation), 9:1-25 under s. 12(1)(g) and s. 88(1)(c.3)(i).
NexPoint Trust proposes to be a dual US REIT/non-SIFT MFT holding U.S. hotels
Nexpoint Hospitality Trust (the “REIT”) is proposing to use the proceeds of an IPO to invest in 11 U.S. hotels. An affiliate of its advisor also is the advisor to the NYSE-listed NexPoint Residential Trust. The hotels will be held through an LLC that will elect to be a REIT for Code purposes. In order to comply with the U.S. REIT rules, the hotels will be leased to a taxable REIT subsidiary and will be managed by a third party manager. Part of the consideration received by affiliates of the Advisor for transferring the hotels into the structure will be Class B redeemable units of the hotel LLC owner. The REIT itself will elect to be a REIT for Code purposes. There will be a resulting prohibition against any unitholder or deemed unitholder holding more than 5% of its units.
For Canadian SIFT taxation purposes, the REIT will rely on not holding any non-portfolio property. Anticipated distributions may be sufficient to avoid significant issues arising under the FAPI rules.
Neal Armstrong. Summary of Nexpoint Hospitality Trust Circular under Offerings – REIT and LP Offerings – Cross-Border REITs.
Recent U.S. tax changes create uncertainty for the proposed Americas Silver acquisition of Pershing Gold
Americas Silver, an Ontario corporation listed on inter alia the TSX and NYSE American exchanges, is proposing to acquire Pershing Gold, a listed Nevada corporation, in exchange for Americas Silver shares. The acquisition would entail the merger of Pershing Gold with a newly-formed Nevada subsidiary of Americas Silver, with Pershing Gold being the survivor and with the Americas Silver shares being issued on the merger. The former Pershing Gold common shareholders will thereby become holders of approximately 36.5% of the Americas Silver common shares.
The U.S. tax disclosure indicates that as a result of the removal, in the recently enacted Tax Cut and Jobs Act, of an exception to the application of Code s. 367(a) for the transfer of property by a U.S. person to a foreign corporation for use by such foreign corporation in the active conduct of a trade or business outside the U.S., it is unclear whether resident U.S. shareholders of Pershing Gold will receive rollover treatment for Code purposes on the merger. The anti-inversion rules in Code s. 7874 are not expected to apply given that the Pershing Gold Stockholders are expected to own less than 60% by votes and value of the Americas Silver common shares.
Neal Armstrong. Summary of Pershing Gold Corporation Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Outbound – Delaware etc. Merger.
Crombie REIT used a s.132.2 merger and a renunciation of most of the units otherwise issuable on the merger in order to eliminate a REIT corporate subsidiary held through an LP
Crombie REIT held the units and notes of a subsidiary unit trust (Crombie Subsidiary Trust), whose principal asset was most of the partnership interests, other than exchangeable LP units held by the Empire group, in a subsidiary LP (“Crombie LP”), which held real estate and a corporate subsidiary (“CDL”).
In a 2017 reorganization, the REIT first eliminated Crombie Subsidiary Trust by setting up a unit trust (“MFT”), having Crombie Subsidiary Trust transfer its assets to MFT under s. 107.4, distributing just enough units of MFT to its unitholders for MFT to qualify as a mutual fund trust, and then instigating a s. 132.2 merger of MFT into the REIT.
The REIT also did not want CDL to be subject to potential corporate income tax. Had the REIT now held CDL directly, this would have been accomplished by incorporating a subsidiary (“MFC”), distributing relatively modest shareholdings in MFC to its unitholders sufficient to qualify MFC as a mutual fund corporation, amalgamating MFC and CDL so that Amalco also qualified as a mutual fund corporation, and then instigating the merger of Amalco into the REIT under s. 132.2 – so that the former assets of CDL were now held directly by the REIT.
A complicating factor was that, as noted, CDL was held by a partnership (Crombie LP). Accordingly, Crombie LP first transferred its CDL shares to MFC under s. 85(2) in consideration for most of the shares of MFC (so that CDL could then be vertically amalgamated with MFC to form Amalco). On the s.132.2 merger of Amalco into the REIT, Crombie LP renounced the receipt of the REIT units that otherwise would be receivable by it on the redemption of its Amalco shares. CRA ruled that Crombie LP was not required to include any amount in its income as a result of the exercise of its right of renunciation.
Neal Armstrong. Summary of Crombie REIT Circular under Other – Internal S. 132.2/107.4 Mergers.
Brunette v. Legault Joly Thiffault – Supreme Court of Canada finds that a shareholder generally cannot sue for bad tax advice provided to the corporation
A Quebec trust, whose sole asset was its investment in the holding company for a group of retirement residences companies (Groupe Melior) that became bankrupt following an ARQ assessment, sued the professional advisors of Groupe Melior on the basis that they had set up a flawed tax structure for Groupe Melior. In finding that the trust had no standing to bring this action because it was a mere shareholder, Rowe J indicated that the “the civil law produces a conclusion similar to that” under Foss v. Harbottle (1843), 67 E.R. 189 “which categorically bars shareholder recovery for faults committed against a corporation,” stating:
The corporate veil is impermeable on both sides; just as shareholders cannot be liable for faults committed by the corporation, so too are they barred from seeking damages for faults committed against it … .
There was an exception to this rule where shareholders established that there had been the breach of “a distinct obligation owed to the[m]” by the defendant and “this breach resulted in a direct injury suffered by the shareholders, independent from that suffered by the corporation.…” This was not established to be the case here. The loss suffered by the trust was precisely the loss suffered by Groupe Melior: a loss based on the net value of the seniors’ residences.
Neal Armstrong. Summary of Brunette v. Legault Joly Thiffault, s.e.n.c.r.l., 2018 SCC 55 under General Concepts – Negligence.
Boguski - Tax Court rejects the first attempt by CRA to use the expanded s. 174 application procedure
In 2013, s. 174 was expanded so that it could be used to request a determination by the Tax Court on questions involving a large group of unrelated taxpayers who entered into similar transactions with a third party. CRA sought to have the Tax Court make a determination as to the validity of Canadian development expense claims by 81 different taxpayers respecting their purchase of rights from a resource company.
D’Arcy J first excluded about half of the named taxpayers on the grounds that the Minister had failed to establish that they had filed valid notices of objection to denials of CDE for the indicated taxation years. This still left 42 taxpayers as to whom D’Arcy J determined that directing a hearing of the s. 174 question would be “significantly more expensive and time-consuming than proceedings that would otherwise occur under the Court’s Lead Case Rules” given the large number of participants, the likely confusion for the self-represented litigants and the effective requirement for them to travel to Winnipeg for a hearing rather than having any appeal held close to home. He also found that the attempted use of s. 174 by CRA was an abuse of process, in part, because it effectively amounted to an attempted end run around jurisprudence limiting the scope of Rule 58 applications.
It appears to be contemplated that the main issue will be largely decided later through the two lead taxpayers going before the Tax Court.
Neal Armstrong. Summary of Boguski v. The Queen, 2018 TCC 236 under s. 174(3).
CRA finds that costs of consultations with an aboriginal community respecting an exploration program qualified as CEE
Para. (f) of the definition of Canadian exploration expense refers to expenses incurred for the purpose of determining the extent or quality etc. of a Canadian mineral resource including “for environmental studies or community consultations.”
CRA indicated that this test would generally be satisfied respecting various expenses incurred by a Canadian exploration company in engaging with a First Nations community to obtain its support for an exploration program including funds initially advanced to the community to fund an information program, ongoing consultation expenses (e.g., of reports to the community), environmental studies as to the potential impact of the exploration program, e.g., as to species at risk, and of expenses for legally documenting arrangements agreed to with the leaders of the community during community consultations.
Neal Armstrong. Summary of 15 November 2018 External T.I. 2018-0762201E5 under s. 66.1(6) – Canadian exploration expense – para. (f).
CRA indicates that express consent to receiving T3 or T5 slips can be provided as part of the process of downloading them
In 2017-0730761I7, the Rulings Directorate indicated that, given the wording of Regs. 209(3) and (4), financial institutions cannot provide their clients with electronic copies of information slips (e.g., T3s, T5s or NR4s) on a secure website without the written or electronic consent of the clients, even where the T3s etc. have also been provided in written form (subject to a limited exception permitting the provision of T4s in electronic form).
In response to a follow-up query on this, the Directorate stated the required “consent can be granted by the Client on the website itself” and that:
where a Client signs up for online access to a secure website and downloads their tax information from the site, the express consent requirement in subsections 209(3) and (4) would be met provided the Client is duly informed and acknowledges that they are consenting to receive their information slips electronically.
This does not sound any more onerous than acknowledging that you are 19 when you buy wine online.
Neal Armstrong. Summary of 18 October 2018 External T.I. 2018-0768931E5 under Reg. 209(3).
12 further full translations of CRA French-language interpretations are available
The table below provides descriptors and links for another 12 of the 2018 APFF Roundtable items recently released by CRA, as fully translated by us. (In October, we provided full-text translations of the CRA written answers, but only summaries of the questions posed.) The Rulings Directorate made some minor additions to the final version of the answers. In particular, in Q.3 of the Financial Strategies Roundtable, CRA added two paragraphs at the end dealing with the point that an individual cannot be a source individual respecting himself.
The above items are additions to our set of 733 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.
Kinder Morgan reduces its shares’ PUC by more than the PUC distribution by it of the Trans Mountain pipeline sales proceeds
As a result of its indirect 30% interest in the Trans Mountain pipeline system, Kinder Morgan realized $1.2 billion on the sale of the system to the federal government for $4.5 billion. Kinder Morgan will distribute that sum to its shareholders as a stated capital (and paid-up capital) distribution. The exclusion from deemed dividend treatment under s. 84(4.1) for a one-off distribution of recently-received sales proceeds is being relied upon.
Quite unusually, the stated capital reduction (of $1.45 billion) exceeds the $1.2 billion stated capital distribution amount, so that the stated capital of the shares will be reduced to approximately $0.33 billion. This is being done in order to not be subject to potential solvency test restrictions under ABCA in declaring dividends. Public company PUC is useless – except when it is useful.
Neal Armstrong. Summary of Kinder Morgan Canada Circular under Spin-offs & Distributions – ss. 84(4.1)(a) and (b) distributions of proceeds.