News of Note

The Directorate confirmed that a non-resident may offset a taxable capital gain on the disposition of taxable Canadian property with a net capital loss that arose on a previous deemed disposition, while the taxpayer was a resident of Canada, of capital property that was not TCP. The particular situation being addressed was a Canadian corporation that realized a deemed capital loss under s. 128.1(4)(b) on the disposition of non-TCP on its emigration from Canada, and carried that loss forward for use when it subsequently disposed of TCP. The restriction in s. 111(9) did not apply because such deemed disposition occurred (barely) within the deemed stub taxation year, ending immediately before the time of its emigration, and it was still resident in Canada in that stub year.

Neal Armstrong. Summary of 24 July 2017 Internal T.I. 2017-0705801I7 under s. 111(9).

CRA had previously commented that the conversion of particular USLPs into LLCs gave rise to FMV dispositions at the member and USLP level. CRA has now stated its “general view” (subject to a caveat about ruling applications being better) that the starting outside and inside basis for the new LLC also would be such FMV. CRA also adverted to its recent position that US LLPs and LLLPs generally are corporations – but it was beyond the scope of the question to comment on conversions going the other way, e.g., converting an LLP (viewed as a corporation) into an LP.

Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference CRA Roundtable, Q.15 (Official Response) under s. 95(2)(f).

Following the nullification of the original Birchcliff decision, a fresh judgment has been issued.

That case concerned a newly-launched public corporation ("Birchcliff") accessing the losses of a lossco ("Veracel") in order to shelter the profits from producing oil and gas properties which it was acquiring. Rather than financing the properties directly, private placement investors were told that they could subscribe for subscription receipts of Veracel instead, which was not a problem to them because their subscription receipts would be converted into Veracel Class B common shares as a transitory step under a Plan of Arrangement in which Veracel was then amalgamated with Birchcliff. As the investors received a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided. The original Veracel shareholders got a modest preferred share interest in Amalco, which was redeemed for cash.

As part of his description of the facts, Jorré J made a finding that Birchcliff’s purpose in amalgamating with Veracel was to access the Veracel losses, given that Birchcliff did not need Veracel if all it wanted to do was an equity raise. However, when he got to his GAAR analysis of s. 245(3), he stated:

[I]t is absolutely clear that the series of transactions here was not undertaken primarily for purposes other than to obtain the tax benefit. Therefore, the series is an avoidance transaction.

He did not cite any authority for his equating of a series with a transaction.

His abuse (s. 245(4)) analysis was straightforward. He stated:

The statutory provision itself shows that the policy underlying the provision is that the “minority” predecessor, i.e. the predecessor whose shareholders, were they acting in concert, would not have control in the amalgamated corporation, will lose its tax attributes, its losses, on an amalgamation with another corporation. It does not include what might be described as contingent shareholders like the Class B shareholders here.

The artificial insertion of Class B shareholders of Veracel, persons whose shares’ only purpose was to be converted into common shares, and whose shares had such a short existence that they had to be deemed by the plan of arrangement to be created before the amalgamation, is a manipulation of the shareholdings of a predecessor contrary to the object of the rules in subsection 256(7).

Consequently, there was an acquisition of control for purposes of the Veracel losses.

Neal Armstrong. Summaries of Birchcliff Energy Ltd. v. The Queen, 2017 TCC 234 under s. 245(3), s. 245(4), s. 251.2(2)(a) and General Concepts – Sham.

In response to a question on what is its policy on tax accrual working papers following BP Canada (which was not appealed based on a discomfort in seeking before the Supreme Court confirmation of an unfettered right to information), CRA indicated that its policy is to request only the information that it believes it requires, with its focus being on determining what the taxpayer has done (as contrasted apparently with seeking evidence of the taxpayer’s concerns about what it did). CRA has set up a committee and is revising its procedures. If the taxpayer receives an unreasonably burdensome request, it should contact a senior large case manager or TSO assistant director.

Neal Armstrong. Summary of 20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.11 under s. 231.1(1)(d).