News of Note
Proposed Metro acquisition of PJC accommodates non-cash dividends by PJC Holdcos to electing Canadian shareholders
Email this ContentUnder the proposed acquisition of The Jean Coutu Group (PJC) Inc. by Metro Inc. under a triangular amalgamation involving a subsidiary of Metro, PJC shareholders will be given a choice of cash or Metro shares, subject to proration to accommodate the intended global allocation of cash of approximately $3.377 billion and Metro shares valued at approximately $1.126 billion. Cash will be paid through the issuance of full-PUC redeemable prefs of Amalco which will be immediately redeemed. As an exception to this basic mechanic, a resident taxable PJC shareholder is given the option of rolling its PJC shares into a new single-purpose Quebec holding company, with that Holdco then being included in the amalgamation and with its shares effectively converted into Metro shares or cash in the same way. The extensive stated limitations on what a “Qualifying Holdco” is permitted to do state that it:
will not have paid any dividends or other distributions, other than an increase in stated capital, a stock dividend, a cash dividend financed with a daylight loan or a dividend paid through the issuance of a promissory note with a determined principal amount and any such promissory note issued in relation to the payment of any such dividend will have been capitalized… .
Similar planning occurred in the AIP acquisition of Canam.
Neal Armstrong. Summary of PJC Circular under Mergers & Acquisitions – Amalgamations – Triangular Amalgamations.
University Hill – Federal Court of Appeal finds that a settlement agreement agreeing as to round percentages of expenses that were unreasonable accorded with Galway
Boivin JA found that a settlement agreement with CRA, that stipulated the disallowance of various categories of expenses incurred by film-production tax-shelter LPs or round percentages thereof or formula amounts, did not violate the Galway principle given that this was not inconsistent with s. 67, which could be applied to disallow only a portion of such expenses. Essentially, the point is that Galway precludes a compromise that is irreconcilable with the ITA, but does not preclude a compromise on the facts.
Neal Armstrong. Summaries of University Hill Holdings Inc. (formerly 589918 B.C. Ltd.) v. Canada, 2017 FCA 232 under s. 169(3) and s. 152(1).
CRA rules that a U.S. public corporation can issue flow-through shares for work under a farm-in agreement with a Canadian sub
A U.S. corporation (Bco) whose shares were listed on a redacted exchange was a principal business corporation by virtue of most of its assets being shares and debt of Canadian mining or exploration subsidiaries. In order that it can finance exploration work on properties of one such sub (Aco) through issuing flow-through shares to be issued to Canadian investors and listed on that exchange, Bco will enter into simple farm-in agreements with Aco respecting two of those properties (consisting of mining claims) and earn a working interest in those properties by expending the flow-through proceeds on related exploration work.
CRA ruled that Bco’s status as a U.S. public corporation would not preclude it from renouncing CEE provided that it was carrying on business in Canada. The Additional Information indicated that once it had earned the working interests, Bco might transfer those interests to Aco under s. 85(1).
Neal Armstrong. Summaries of 2016 Ruling 2015-0614081R3 under s. 66(12.71) and s. 66.1(6) – CEE – (f).
Pre-production mine development expenses that qualify under CEE – (g.4) need not qualify under (g.3)
Para. (g.3) of the Canadian exploration expense definition provides that pre-production mine development expenses could qualify if, among other conditions, they were incurred under an agreement entered into before March 21, 2013. Would this requirement be satisfied where a principal-business corporation issued flow-through shares pursuant to a December 31, 2012 flow-through share agreement but incurred the 2013 expenses under the look-back rule pursuant to an agreement which it entered into with a subcontractor in 2013 but after March 21, 2013?
CRA ducked this question by noting that, even if the relevant agreement for purposes of the March 21, 2013 cut-off was the subcontracting agreement, the expenses would qualify under para. (g.4) as having been incurred before 2015.
Neal Armstrong. Summary of 11 October 2017 Internal T.I. 2017-0719181I7 F under s. 66.1(6) – CEE – para. (g.4).
CRA will issue s. 116 certificates based on the draft s. 87(8.5) foreign merger rollover
Draft ss. 87(8.4) and (8.5) in approximate terms provide that on a same-country related-party foreign merger that meets specified conditions, the foreign merging corporations can file a joint election to have shares that are (non-treaty protected) taxable Canadian property be deemed to have been disposed of on a rollover basis on the merger.
CRA will grant s. 116 certificates based on treating this draft legislation as already being in effect, provided that some back-up for the adjusted cost base of the disposed-of shares is provided to it. No share valuation is required. CRA did not mention any concern about one of the foreign corporations no longer being around to make the election.
This CRA response presumably also applies to the same and similar draft s. 87(8.4) and (8.5) rules respecting trust units and partnership interests, respectively.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.14 under s. 87(8.5) and s. 116(1).
Abenaim – Tax Court of Canada finds that an amount received by a terminated employee (claiming oppression) exceeding 18 months’ salary was non-taxable
A senior employee who, in the somewhat distant past, had also been a shareholder, received damages following his termination, and pursuant to a court-mediated settlement agreement, that were well in excess of the going rate for compensation in lieu of notice of 18 months, and received a T4 treating the full amount as a taxable retiring allowance. D’Auray J treated the portion of the damages in excess of 18 months’ salary as a non-taxable receipt given her characterization of his claim against his former employer as being grounded principally in oppression as contemplated in the CBCA and her finding that, indeed, he had been oppressed a lot.
Neal Armstrong. Summary of Abenaim v. The Queen, 2017 CCI 223 under s. 248(1) – retiring allowance.
Abdalla – Tax Court of Canada finds that a “poorly worded” CRA-drafted waiver nonetheless was good enough to effect a valid waiver of appeal rights when signed
In rejecting taxpayers’ submissions that they had not given valid waivers of their right to appeal, Rossiter CJ quoted the statement in Saskatchewan River Bungalows, [1994] 2 SCR 490 that:
Waiver will be found only where the evidence demonstrates that the party waiving had (1) a full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them.
In finding that this test was satisfied here, he stated that although the waiver letter drafted by CRA was “poorly worded … if read in its entirety … there is a sufficient and adequate explanation in the letter [such] that a person would have full knowledge of the rights being waived.”
Neal Armstrong. Summary of Abdalla v. The Queen, 2017 TCC 222 under s. 169(2.2).
Interest that is denied under the thin cap rules and recharacterized as dividends is still interest for FAPI and LRIP/GRIP purposes
A portion of the interest paid by CanCo to ForCo, which is a controlled foreign affiliate of the Canadian parent of CanCo, is not deductible pursuant to s. 18(4) and is deemed by s. 214(16) to have been paid as a dividend (with CanCo designating under s. 214(16)(b) which particular payment is deemed to be the dividend.)
CRA noted that, as per its preamble, s. 214(16) only applies for Part XIII purposes, so that s. 214(16) would have no effect on CanCo’s LRIP or GRIP balances nor alter the character of the income received by ForCo as interest for foreign accrual property income purposes.
Neal Armstrong. Summary of 5 October 2017 Internal T.I. 2015-0614021I7 under s. 214(16).
Income Tax Severed Letters 29 November 2017
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Greither Estate – B.C. Supreme Court finds that taking back excess boot cannot be rectified under the BCA provision for correcting “corporate” mistakes
A non-resident estate, whose shares of a Canadian company had stepped-up basis under s. 70(5) but had nominal paid-up capital, was advised by a tax lawyer who had forgotten about s. 212.1. After it had been assessed for withholding tax as a result of transferring its shares of the company to a related company for consideration consisting mostly of a promissory note, it applied for relief pursuant to s. 229 of the B.C. Business Corporations Act to correct this “corporate” mistake.
Meyer J noted the somewhat narrow list of types of corrections in s. 229 and found that “the mistake of not completing the Transaction in the most tax effective manner does not … fall within these subsections.” Although he was not asked to provide relief under the general rectification doctrine, he commented on this anyway, stating:
As stated by the majority … in Fairmont Hotels business and individuals should not be allowed to exploit rectification for the purposes of engaging in retroactive tax planning and as stated by the dissent, “allowing parties to rewrite documents and restructure their affairs based solely on a generalized and all-encompassing preference for paying lower taxes is not consistent with the equitable principles that inform rectification.”
Neal Armstrong. Summary of Greither Estate v. Canada (Attorney General), 2017 BCSC 994 under General Concepts – Rectification.