News of Note

CRA ruled on a cross-border butterfly which entailed assets of the “Transferred Business” being transferred indirectly to a wholly-owned non-resident subsidiary (Foreign Spinco) of a non-resident public company (Foreign Parentco) or to a wholly-owned non-resident subsidiary of Foreign Spinco (Foreign Spinco Sub) – with a view to the shares of Foreign Spinco being dividended out to the shareholders of Foreign Parentco at the transactions’ completion. One of the indirect assets of Foreign Parentco was a Canadian corporation (DC) which held the Canadian portions of both the Transferred Business and the “Retained Business” – hence the need for a cross-border butterfly.

Preliminary transactions included the drop-down of the Canadian Transferred Business by DC to a Newco and the transfer of DC by its direct holder (a non-resident subsidiary of DC) to DC.

Following a s. 86 reorg of DC to split its share capital into special and new common shares, there then is a four-party exchange under which Foreign Parentco transfers its special shares of DC to a newly-formed Canadian sub of Foreign Spinco Sub (TCo), TCo issues common shares to Foreign Spinco Sub, Foreign Spinco Sub issues shares to Foreign Spinco and Foreign Spinco issues shares to Foreign Parentco.

On the butterfly proper, DC transfers Newco to TCo in consideration for preferred shares and the assumption of liabilities – except that in order to ensure that the transfer of cash (under the consolidated look-through approach) represented by the transfer of Newco is in the same proportion as the transfer of business assets, there also is a transfer of cash made as of the date of this butterfly distribution but that, in fact (and similarly to 2012-0459781R3 and 2014-0530961R3), is transferred a redacted number of days thereafter in order to accommodate a more accurate computation of the required amount. The sole investment property (a rental property) is valued at nil due to encumbrances.

Thereafter, there is a cross-cancellation of the shareholdings between DC and TC, and TC thus becomes an indirect wholly-owned subsidiary of Foreign Spinco.

Foreign Parentco had first acquired direct ownership of 100% of DC in order that the ensuing exchange by Foreign Parentco of its shares of DC for shares of Foreign Spinco under the four-party exchange arrangement would qualify as a “permitted exchange.”

The butterfly ruling was conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TCo shares or DC special shares.

Neal Armstrong. Summaries of 2017 Ruling 2017-0699201R3 under s. 55(1) – distribution, s. 55(1) – permitted distribution – para. (b) and s. 143(3).

A direct gift of a vehicle to the taxpayer by her ex-husband would have been subject to Quebec sales tax as they were now unrelated persons. From this perspective, QST was avoided as a result of the vehicle being gifted by her ex-husband to her daughter, and then by her daughter to her – both of them, related-person transfers. In finding that these were not avoidance transactions for Quebec GAAR purposes, Poirier JCQ accepted the taxpayer’s testimony that the transactions had to happen this way in order for her to get the vehicle – her ex was only prepared to give the vehicle to her daughter.

He also stated that "utilizing the exemptions provided by the Act cannot constitute an abuse within the meaning of the Act."

Neal Armstrong. Summary of Soucy v. Agence du revenu du Québec, 2018 QCCQ 4845 under ETA s. 274(3).

CRA provided a number of comments on the split income rules:

• In addition to repeating previous comments respecting shares of holdcos not being excluded shares, it confirmed that there was a similar problem for dividends from a related manufacturing company paid through a family trust.
• Where a shareholder-spouse works in only one of two businesses of the corporation, an excluded amount determination respecting the worked-in business requires “separate accounting for each business and a tracing of funds.”
• CRA will cut some slack with respect to pre-2018 years, but on a going forward basis, if reliance will be placed on the spouse or child having worked 20 hours per week in a business, “the ongoing maintenance of [timesheets, schedules, or logbooks] in respect of any family members involved in the business will ensure that businesses are able to comply with the new rules.”
• Respecting the requirement for excluded shares to be of a corporation that derives less than 90% of its business “income” (i.e., revenue) from the “provision of services,” CRA repeated some previous examples about replacement part sales by plumbers and mechanics being good, whereas charges by an office cleaner for cleaning supplies are to be ignored - but then went on to note that:

We are in the process of preparing examples to illustrate how the determination of whether less than 90% of the income of a corporation is from the provision of services is made.

Neal Armstrong. Summaries of 25 May 2018 External T.I. 2018-0761601E5 under s. 120.4(1) – excluded shares – para. (b), excluded shares – subpara. (a)(i), excluded amount – subpara. (e)(ii) and s. 120.4(1.1)(a).

When the ARQ laid the information seeking a search warrant for a search of the taxpayers’ office, it did not disclose, despite being aware that this was likely, that a lawyer and notary worked at those premises, and the search warrant accordingly was issued by the magistrate without knowledge of this. After noting that in fact there had been issues as to the proper protection of legal privilege, Mainville JCA affirmed the annulment by Dallaire JCS below of the search warrant and his order to return the seized documents.

Neal Armstrong. Summary of Agence du revenu du Québec v. 9229-0188 Québec Inc. (Saramac Schokbéton Québec Inc.), 2018 QCCA 1039 under s. 231.3(3).