News of Note

CRA rules on the avoidance of s. 80 on extinguishing intercompany debt of an insolvent company

CRA has ruled on a technique for avoiding the debt forgiveness rules on the conversion into preferred shares of intercompany debt owing by an under-water company (Opco).

The affiliated creditors transfer their Opco debt (with principal of $100 and a value of $1) to a Newco subsidiary of Opco (Subco) in exchange for pref of Subco having a value of $1.  As the debt so acquired by Subco is deemed by ss. 40(2)(e.1) and 53(1)(f.11) to have an adjusted cost base of $100, that debt can then be extinguished, on winding-up Subco into Opco, without the debt forgiveness rules applying (per the s. 80.01(4) rule).

Neal Armstrong.  Summary of 2012 Ruling 2011-0426051R3 under s. 80.01(4).

Immunovaccine - Tax Court finds that government loans made on non-commercial terms are "government assistance"

Under a federal program for fostering Maritimes development, the taxpayer received interest-free advances which were repayable only out of a percentage of future revenues.

Lamarre J. found that the advances were "government assistance" which reduced the taxpayer's SR&ED credits.  Although they were not subsidies or forgivable loans, they were "any other form of assistance," which she interpreted as including funds advanced on terms that a private investor would never consider.

Scott Armstrong.  Summary of Immunovaccine Technologies Inc. v. The Queen, 2013 TCC 103, under s. 127(9) - government assistance.

CRA focuses for GST/HST real estate purposes on the beneficial owner

Where real estate is acquired by a bare trustee, the GST/HST consequences of the acquisition attach to the beneficial purchaser.

Consistently with this position, CRA has indicated that application for the new residential rental property rebate should be filed by the beneficial purchaser.  Going somewhat further afield, CRA also is continuing to maintain its position that a bare trustee is not eligible to be the operator under a joint venture even where the routine administration and cash management is done in its name - notwithstanding the widespread use of bare trustee operators.

Neal Armstrong.  Summary of 12 February 2013 Interpretation File 145624 under ETA s. 256.2(3) and  of 21 January 2013 Interpretation Case No. 146302 under ETA s. 273(1).

CRA disagrees with TD Securities

CRA, in addition to applying  Art. IV(6) of the Canada-U.S. Treaty (added by the 5th Protocol) on the basis that an LLC is only entitled to claim Treaty benefits (e.g., reduced Canadian withholding or branch tax) if the amount in question is considered to be derived by a U.S. resident who qualifies under the limitation-of-benefits Article, also "is not in agreement with the decision in TD Securities," so that it presumably will challenge any pre-Protocol benefits claimed by an LLC.

Neal Armstrong.  Summary of 25 September 2012 B.C. CTF Round Table, Q. 10, 2012-0457591C6 under Treaties - Art. 4.

CRA confirms that it considers the date of disposition of shares to be the settlement date

Notwithstanding the cancellation of IT-133, CRA still considers shares to be disposed of on the settlement date as determined by the rules of the applicable stock exchange, which may be two or three days after the trade date.

Scott Armstrong.  Summary of 6 May 2012 TEI Conference, Q. 5, 2012-0468931C6 under s. 248(1) - disposition.

CRA is back again ruling on entity classification

After a three-year hiatus, the Rulings Directorate is again prepared to review rulings requests respecting the classification (e.g., as corporation, trust, partnership or co-ownership) of foreign entities.

Neal Armstrong.  Summary of 30 October 2012 Ontario CTF Round Table, 2012-0463021C6 under s. 248(1) - corporation.

Income Tax Severed Letters 17 April 2013

This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

35% share component for Hecla acquisition of Aurizon is just shy of what's required to assure treatment as a forward triangular merger for U.S. purposes

Under a Plan of Arrangement, a B.C. "Acquireco" subsidiary of Hecla (a U.S. mining company) will first acquire all the shares of Aurizon in consideration for cash and directing the delivery of Hecla shares (with the choice between cash and Hecla shares at the Aurizon shareholders' option subject to the overall mix being 65% cash and 35% Hecla shares).  Then Acquireco and Aurizon will amalgamate.

If the share component had been higher than 40%, this transaction would have qualified as a forward triangular merger for Code purposes, so that U.S. shareholders of Aurizon would only be required to recognize gain to the extent of any cash received by them.  As the share component is only 35%, counsel for Aurizon indicated that it is not possible to determine with certainty that this treatment is available (and Hecla intends to take the position that the exchange is taxable).

The cash consideration will be paid by Hecla directly to the Aurizon shareholders, perhaps so that the Acquireco acquisition can come within the applicable wording of Code s. 368(a)(2)(D).  Presumably this will be treated as a contribution of capital to Acquireco for Canadian purposes.

Neal Armstrong.   Summary of Aurizon Circular under Cross-Border Megers - Inbound - Other.

CRA finds that the HST/GST credit note mechanic was not available in a returned goods situation

The credit note rule in s. 232 provides a mechanism for reducing a Canadian registrant’s GST or HST remittance obligations when it reduces the consideration for a supply.  CRA found that this mechanism was not available when a U.S. affiliate to which the registrant shipped crude oil decided before receiving the crude in the U.S. that the crude was excess to its needs, so that the crude was effectively returned.  CRA construed this as instead being a sale of the crude back to the Canadian registrant, so that the U.S. affiliate (which also was registered) was required to charge GST to the Canadian registrant if the crude that was to be returned was still in Canada.

The distinction between this scenario and a conventional returned goods situation seems quite subtle, so that there may be uncertainty as to the availability of the s. 232 mechanism in the latter scenario.

Neal Armstrong.  Summaries of 5 February 2013 Ruling Case No. 141852 under ETA ss. 232(2) and 153(3), and Sched. VI – Part V – s. 15.2.

CRA considers that the s. 44.1 rollover is not available to shares issued to a discretionary trust, distributed to a beneficiary and then sold

An individual "other than a trust" who disposes of shares which qualified as eligible small business corporation shares "of" the individual at the time of their issuance will be eligible for rollover treatment if replacement shares are acquired and a host of other conditions are satisfied.

CRA considers that shares which were issued to a family trust and later distributed to a beneficiary will not qualify for the rollover treatment on a subsequent sale of those shares by the beneficiary.  This is a reasonable interpretation: the beneficial interest of the individual in a trust (at least provided that it is not vested in possession) likely falls short of those shares qualifying as shares "of" the individual when they are issued to the trust.

Neal Armstrong.  Summary of 27 November 2012 T.I. 2012-0445941E5 F under s. 44.1(1) - qualifying disposition.