News of Note
Loblaw will spin off Choice REIT to GWL pursuant to a double butterfly and triangular amalgamation
Email this ContentLoblaw has a substantial real estate rental portfolio (much of it being stores rented to it plus the former CREIT portfolio) held through Choice REIT. Loblaw will be effecting a butterfly spin-off of its Choice holdings to its parent, George Weston Limited (also TSX-listed) pursuant to a CBCA Plan of Arrangement, subject to receiving CRA rulings. This is to be accomplished by first butterflying the Choice holdings to a “Spinco” held by the Loblaw shareholders including GWL and an indirect GWL subsidiary (WHL). WHL, which apparently also indirectly holds the Weston Foods division, would then effect a butterfly distribution of its Spinco shares to a second transferee corporation (WHL/TC). There then would be a triangular amalgamation of Spinco with inter alia WHL/TC pursuant to which the public shareholders of Spinco would receive GWL common shares in exchange for their Spinco common shares.
In order to effect the initial spin-off to Spinco, there will be a s. 86 exchange of old Loblaw common shares for new Loblaw common shares and Loblaw butterfly shares. In order to reflect the FMV reduction of a Loblaw common share, the existing Loblaw stock options will be exchanged for a higher number of new options with a lower exercise price but an aggregate in-the-money value that is no higher. The in the money amount of the new and old options will be determined based on the weighted average TSX trading price of the Loblaw shares for the five-day trading period beginning on the Effective Date of the Arrangement, and ending immediately before the Effective Date, respectively.
Neal Armstrong. Summary of Loblaw Circular under Public Transactions - Spin-offs and Distributions – Butterfly spin-offs.
Hunt – Tax Court of Canada finds that CRA’s discretion to waive tax does not render the tax unconstitutional
A taxpayer implemented an estate freeze, subscribed for common shares of the company at a low value and contributed those shares to his TFSA at a low value. CRA assessed him advantage tax under s. 207.05 equalling 100% of the appreciation of the shares within his TFSA before the shares’ sale – and following a Federal Court action by him, proposed to reduce the rate of advantage tax to his marginal federal and provincial tax rate.
Pizzitelli J rejected the following taxpayer argument: s. 207.05 contravened s. 53 of the Constitution Act, 1867 because “the existence of the discretionary relieving provision of section 207.06 following 207.05 gives the Minister the discretion to set the tax rate from anywhere between 0 and 100 percent thus amounting to an implied delegation of the right to set the tax rate.” Pizzitelli J also found that s. 207.05 did not infringe on the provincial right to make laws respecting “property and civil rights.”
Neal Armstrong. Summaries of Hunt v. The Queen, 2018 TCC 193 under s. 207.05(2), s. 207.06(2) and Constitution Act, 1867, s. 91(3).
CRA confirms the application of its GST/HST wash transaction policy where ITCs claimed in the wrong entity
CRA confirmed that its wash transaction policy for mistakes by registrants engaged exclusively in commercial activity can apply to input tax credits claimed in the wrong entity, as well as to a failure to charge GST/HST. For example, two closely-related corporations (A and B) involved exclusively in commercial activity get two invoices mixed up, so that A mistakenly claims an ITC for the larger rather than smaller invoice, and B mistakenly claims an ITC for the smaller rather than larger invoice. CRA confirmed that the interest assessed on A for overclaiming an ITC will be limited to the lesser of the interest otherwise payable on the amount of the excess ITC and 4% of that ITC.
Neal Armstrong. Summary of 8 March 2018 CBA Roundtable, Q.24 under ETA s. 281.1(1).
CRA indicates that the HST rebate for books is unavailable for audio books where a printed version does not exist
The participating provinces provide point-of-sale rebates for “printed books.” CRA considers that this rebate is available for audio books provided that there is already a pre-existing printed version of the book.
Neal Armstrong. Summary of 8 March 2018 CBA Roundtable, Q.23 under Deduction for Provincial Rebate (GST/HST) Regulations – Sched.1 – s. 1.
We have 666 translations of CRA French-language interpretations!!
Well, 670 actually. The table below provides descriptors and links for six 2012 APFF Roundtable Interpretations as well as for an earlier interpretation (included somewhat out of sequence), all as fully translated by us.
These (and the other full-text translations covering all of the French-language Interpretations released in the last 5 2/3 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.
Making an s. 95(12) election may permit a Canadian to benefit from having active business income in its cell of a cell company
The tracking interest rules in the 27 July 2018 draft legislation can apply inter alia to cell companies for which each cell is a class of shares that tracks to specified property or activities, and each is insulated from the liabilities of all the other cells of the corporation. (LLC membership agreements can be drafted to produce a somewhat similar effect.)
In the absence of an s. 95(12) election, the general effect of s. 95(10) is that foreign accrual property income (FAPI) is allocated (pursuant inter alia to Reg. 5904) to the Canadian cell holder taking into account its dividend entitlement. This “base rule can create FAPI computational issues when there is insufficient information on some cells, create CFA status when it would not arise if the cell was a separate corporation, or cause a Canadian to pick up a pro rata share of the corporation's FAPI whether or not it arises from the Canadian's cell.”
These issues can be addressed or alleviated by making the s. 95(12) election to effectively deem the relevant cell to be a separate corporation. One of the potential advantages of making this election that is not mentioned in the Explanatory Notes is that the Canadian’s cell may earn active business income and disproportionately low FAPI, so that the FAPI pickup of the Canadian may be lowered if it comes exclusively from the Canadian’s cell.
Neal Armstrong. Summaries of Nathan Boidman, “Canada Targets Conduits and Tracking Shares,” Tax Notes International, September 17, 2018, p. 1223 under s. 95(9) and s. 95(12).
CRA has officially released its 2018 STEP Roundtable answers
Although most of the CRA responses to questions posed at the May 29, 2018 STEP Roundtable have already been commented on by us, we are providing the following table (with descriptors, and links to the responses officially released this week under the Severed Letter Program) for convenience of reference.
LPIC – Tax Court of Canada finds that LPIC is not exempt under s. 149(1)(d.5) because its owner (the Law Society) merely regulates lawyers rather than governing Ontarians
Whether LPIC, which was a subsidiary of the Law Society of Upper Canada, qualified as a tax exempt, turned on whether the Law Society satisfied the condition in s. 149(1)(d.5) of being a “public body performing a function of government in Canada.”
The Law Society got through the first part of the quoted phrase because it satisfied the “three-part English test” for being a “public body,” which was that “the entity must have a duty to the public, it must be subject to a significant degree of government control and it must not use any of its profit for the personal benefit of its members.” However, it failed the “function of government” test. D’Arcy J stated:
The Law Society performs its various functions in the course of regulating the legal profession, not in the course of governing people located in Ontario.
Neal Armstrong. Summary of Lawyers' Professional Indemnity Company v. The Queen, 2018 TCC 194 under s. 149(1)(d.5).
CRA suspends its proposal to impose advantage tax, where RRSP or TFSA fees are paid by the annuitant or holder, pending a Finance review
In 29 November 2016 CTF Roundtable Q. 5, 2016-0670801C6, CRA indicated that the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder typically would now be considered as an “advantage” giving rise to tax under s. 207.05(1) equal to 100% of the fee amount (noting inter alia under the hypothetical arm’s length test in s. 207.01(1) – advantage - (b)(i) that it would not be “commercially reasonable for an arm’s length party to gratuitously pay the expenses of another party”) - but that it would defer applying this new position until January 1, 2018 (subsequently extended by 2017-0722391E5 to January 1, 2019).
Hot on the heels of releasing its new Folio on Advantages, CRA has now stated:
[W]e will be deferring implementation of the position pending completion of a review of the issue by the Department of Finance Canada.
Neal Armstrong. Summary of 28 September 2018 External T.I. 2018-0779261E5 under s. 207.01(1) - advantage - (b)(i).
Income Tax Severed Letters 3 October 2018
This morning's release of 19 severed letters from the Income Tax Rulings Directorate is now available for your viewing.