News of Note
Income Tax Severed Letters 21 March 2018
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Blackstone acquisition of Pure Industrial REIT entails a take-up of units in two tranches and contemplates a bump of a U.S. private REIT
It is proposed that all the units of Pure Industrial REIT will be acquired for cash by a B.C. ULC subsidiary of Blackstone (“Purchaser”) under a B.C. Plan of Arrangement. All but the units of the 175 smallest unitholders (holding at least 100 units) will be acquired in the first tranche – and then, 60 seconds later, the units of the remaining 175 unitholders will be acquired. This is to clarify that, for purposes of the Ontario land transfer tax exemption for mutual fund trust unit transfers, the REIT will still satisfy the relevant Ontario MFT tests at the time of the take up of most of the REIT units.
Roughly ¼ of the REIT’s properties are U.S. properties which are held in a U.S. private REIT subsidiary of a B.C. holding company (“CanCo SPV”) that, in turn, is held by the REIT. The Trust has covenanted that it will not do anything that “could reasonably be expected to have the effect of preventing Purchaser or a wholly-owned subsidiary of Purchaser, from obtaining the benefit of a ‘full tax cost bump’ pursuant to the Tax Act” respecting the shares of the U.S. REIT. Opinions will be delivered at closing to a REIT sub and Blackstone sub that the U.S. REIT has qualified as such for Code purposes.
The only corporate step in this corporate plan of arrangement is a transaction in which a B.C. subsidiary of Purchaser, immediately before the acquisition of the REIT units, subscribes $805 for 80.5M CanCo SPV preferred shares with undisclosed attributes.
As this is a purchase rather than redemption transaction, there are no Part XIII.2 withholding issues.
Neal Armstrong. Summary of Pure Industrial REIT Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Trust Acquisitions by Corporations.
Brochu – Quebec Superior Court decision suggests that a requirement to provide documents “immediately” is contrary to s. 231.2
The Sherbrooke police seized $1.4M in cash and jewels, along with guns, of the plaintiff (“Brochu”), who had “underworld dealings.” The ARQ then arrived at the same premises (his residence) at 10 p.m. and served him with a requirement pursuant to the Quebec equivalent of ITA s. 231.2 to produce a wide range of documents “immediately,” and then carted away 13 boxes of documents. Before finding that this requirement was a disguised seizure made without judicial authorization, and awarding Brochu $10,000 in damages for “trouble, vexation and inconvenience,” as well as $100,000 in punitive damages “in order to make the ARQ and its auditors understand that ‘the end does not justify the means’,” Villeneuve JCS stated:
[W]hen the ARQ required that Brochu provide documents “immediately,” it infringed the spirit of the TAA as it provided absolutely no period in which the latter could comply, and furthermore imposed its ultimatum in a place serving as a taxpayer’s residence.
The absence of any period within which to produce by itself rendered the Requirements abusive.
Furthermore, the impressive quantity of particulars and documents demanded of Brochu rendered it impossible to respond immediately, particularly when taking into account that the Requirements extended to five companies as well as the personal affairs of Brochu over a period of almost 15 years. …
[A] requirement certainly cannot be used to disguise a seizure made without judicial authorization.
In such circumstances, section 8 of the Charter … was infringed by the ARQ… .
Although the ARQ acted hastily because it was concerned about the destruction of evidence, the correct remedy for this was an Anton Pillar order, which required judicial authorization (none was obtained)
Neal Armstrong. Summary of Brochu v. Agence du revenu du Québec, 2018 QCCS 722 under s. 231.2(1).
Seven further full-text translations of CRA interpretations are available
The table below provides descriptors and links for the French Technical Interpretation released last week, for two French Technical Interpretations released in November 2013 and for four questions from the October 2013 APFF Roundtable, as fully translated by us.
These (and the other full-text translations covering the last 4 1/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
6094350 Canada Inc. and Genex Communications - Court of Quebec finds that tax advice with clearly flawed factual assumptions did not meet a director’s due diligence defence
The individual taxpayer (Demers) was a director of the owner of the RadioX team, which was a minor professional hockey team that played in the Ligue Nord-Americaine de Hockey (which was popular with some fans for having over 5-times more fights per game than the NHL). The corporation had been treating its players (and other staff) as employees rather than independent contractors for Quebec health tax purposes in accordance with the known views of the ARQ, but then commenced to treat them as independent contractors. The players did not register for GST/QST purposes or invoice for their services, and declined to sign a written contract (which did not reflect the realities of how the team continued to be operated), and the only substantive change made was that the team manager was incorporated.
After finding that the players continued to be employees, Cotnam JCQ next dealt with the due diligence defence of Demers under the equivalent of ITA s. 227.1(3) (the corporation having since been wound up without paying any of the source deductions), which was based on the proposition that he had been advised by his tax advisor, Ms. Rochette (who was also his wife and a co-director of the corporation) that the players were now independent contractors. In rejecting this defence, Cotnam JCQ noted that the views of Ms Rochette were based on a factually incorrect matters that could have been readily checked by her, including that the players could play for other teams, that they had their own tools and that the team did not reimburse them for their expenses, and also noted that Ms. Rochette had not consulted the jurisprudence. She then stated:
Mr. Demers, in his capacity of director, could not blindly rely on an opinion whose assumptions were clearly incomplete.
However, she went on to find that the assessment of Mr. Demers was statute-barred.
Neal Armstrong. Summaries of 6094350 Canada Inc. and Genex Communications Inc. v. Agence du revenu du Québec, 2018 QCCQ 556 under s. 5(1), s. 227.1(3) and s. 152(1).
CRA rules on pipeline transfers of shares with both “soft” and “hard” ACB
CRA has ruled on a pipeline involving Opco shares inherited by an individual whose ACB consisted of both “soft” ACB (attributable to V-Day value basis of the deceased and the deceased’s use of the capital gains deduction immediately before death) and “hard” ACB (attributable to the further step-up in the shares’ ACB under s. 70(5).) The proposed transactions entailed the s. 85(1) transfer by him to a Newco of his Opco shares for notes in an amount close to the transferred shares’ hard ACB and preferred shares as to the balance – followed by an amalgamation (or wind-up) of the Opcos over a year later and gradual repayment of the notes on a redacted timetable.
Neal Armstrong. Summary of 2017 Ruling 2016-0629511R3 under s. 84(2).
CRA rules that the merger of two segregated funds held by the same insurer would occur on a s. 107.4 rollover basis
CRA ruled that the s. 107.4 rollover applied to the “transfer” of all the property of one segregated fund to another segregated fund held by the same insurer. The insurer was the legal and beneficial owner of both funds’ properties both before and after, so that the transfer consisted in the insurer starting to book the securities of the first fund as being securities of the second fund, and adjusting the notional units of the policyholders accordingly. Thus, the rulings essentially turned on the proposition that these book entries were sufficient to effect a transfer of property from one fund (which was deemed by s. 138.1 to be a trust) to the second such deemed trust, notwithstanding the absence of specific language in s. 138.1 to that effect.
As it happened, the property of the two funds was essentially identical (units of a mutual fund trust), but the logic in this ruling would appear to extend to situations where the two funds had different property.
Neal Armstrong. Summary of 2017 Ruling 2016-0625301R3 under s. 107.4(1).
CRA finds that the s. 6(1)(a)(ii) exclusion for employer RCA contributions was effectively allocated between Cdn and US employment income of an athlete
40% of a non-resident athlete’s $2 million compensation package from a Canadian team was in the form of annual team contributions to his retirement compensation arrangement. Upon retirement or loss of employment, the athlete would receive a lump sum cash-out payment from the RCA that would be subject to 25% Part XIII tax.
CRA indicated that the $800,000 annual team RCA contribution was excluded from employment income under s. 6(1)(a)(ii) and that the (net) employment income of $1,200,000 should be allocated as to 40% (or $480,000) to Canada based on the higher number of games played in the U.S. Thus a submission that the athlete’s Canadian employment income under s. 115(1)(a)(i) was nil through allocating the s. 6(1)(a)(ii) exclusion wholly to the Canadian income ($2 million x 40% - $800,000) was unsuccessful.
A variant of these facts entailed the athlete and team each annually contributing $400,000 to the RCA. In finding that the employee contributions would not qualify for deduction under s. 8(1)(m.2), which refers inter alia to deduction of “an amount contributed by the taxpayer in the year to a pension plan in respect of services rendered by the taxpayer … where the plan is a [RCA],” CRA stated:
[A] plan will not be a pension plan where the only payment provided for under the terms of the plan is a single lump sum payable on retirement or loss of employment. … [A] plan that is excluded from being a salary deferral arrangement (“SDA”) by virtue of the special exception for professional athletes in paragraph (j) of the SDA definition in subsection 248(1) [also] will not be a pension plan, regardless of the form of benefits provided.
The first reason for denial focuses on the implausible situation of a plan providing only for the payment of a lump sum on retirement or termination, rather than providing for a retirement pension but with provision for commutation on specified events. The second reason appears to be an exercise in policy making rather than statutory interpretation.
Neal Armstrong. Summaries of 21 February 2018 External T.I. 2017-0702061E5 under s. 115(1)(a)(i) and s. 8(1)(m.2).
CRA elaborates on the relationship between Part IV tax and s. 55(2) and related amended return filings
2017-0724071C6 indicated that where Holdco receives a dividend of $400,000 that was subject to Part IV tax of $153,333 (38.33% of $400,000) equalling the connected payer’s dividend refund and, in turn, pays a dividend to its individual shareholders resulting in a dividend refund (DR) of the Part IV tax – so that the dividend received by Holdco was subject to s. 55(2) there should be two returns filed by Holdco – one reporting the Part IV tax, and a second one reporting the capital gain under s. 55(2), thereby giving rise to refundable tax and an addition to Holdco’s RDTOH account which could only be used prospectively. CRA has now provided six detailed numerical examples going through variants on this scenario.
Respecting scenarios where Holdco did not pay a full dividend to its individual shareholder, CRA stated:
[A]ny future payment of a taxable dividend by Holdco that resulted in a refund of Part IV tax could result in the potential application of subsection 55(2) to the extent that this payment was part of the same series of transactions. The CRA would consider any future DR as a result of the payment of a dividend by a corporation, where the payment was part of the same series of transactions, as coming first from the Part IV tax paid on the taxable dividend.
Respecting when the amended return of Holdco should be filed, CRA indicated a preference for Holdco to wait until its original return was assessed. If Holdco wanted to avoid interest charges by paying at the time of the first return an amount that took into account its s. 55(2) liability to be reported in the second return, CRA described the procedures for avoiding having this overpayment refunded in the interim.
Neal Armstrong. Summary of 18 December 2017 External T.I. 2017-0714971E5 F under s. 55(2).
CRA finds that lacunae in the s. 87 rules do not deny the s. 22 election to an Amalco
Immediately after its formation, Amalco dropped the business of a predecessor down to a partnership under s. 97(2) – except that it used the s. 22 election for the transferred trade receivables. The Directorate found that as a technical matter the s. 22 election was not available – effectively because s. 87(2)(g), which deemed Amalco to be a continuation of the predecessor for purposes of the ss. 20(1)(l) and (p) reserve provisions, did not go further to deem the Amalco receivables to have been includible in its income. Furthermore, it was at least somewhat doubtful that Amalco carried on the predecessor’s business given that the drop-down occurred within minutes of the amalgamation.
The Directorate nonetheless concluded that the s. 22 election was valid as denying the election “runs against the legislative scheme of section 87.”
Neal Armstrong. Summary of 24 October 2017 Internal T.I. 2017-0719531I7 under s. 22(1).