News of Note

Morguard - Federal Court of Appeal finds that break fee was taxable

A break fee received by Morguard was fully taxable as business income.  This essentially followed from the finding of fact by Boyle J in the Tax Court that Morguard's ordinary business activities included the making of business acquisitions - so feel free to argue that any break fee received by you arose only in the course of an investment undertaking!

Neal Armstrong.  Summary of Morguard Corporation v. The Queen, 2012 FCA 306 under s. 9 - exempt receipts.

CRA finds that an immediate right to elect a majority of the board is not necessary in order to have corporate control

CRA agreed that a corporation (the "Parent"), with a significant majority  of the shares of another corporation ("Lossco"), controlled Lossco notwithstanding that the Class B shares of  Parent did not have the right to vote on the election of the directors of Lossco, whereas the Class A shares of Lossco held mostly by an arm's length individual had full voting rights.  Accordingly, Lossco could be amalgamated with a "Profitco" subsidiary of Parent without the loss streaming rules applying to Lossco's losses.

The key to getting CRA to agree to this was that Parent's voting rights gave it the right to engage in a consolidation transaction in which the Class A shares would be cashed out, after which Parent as the holder of the only remaining class of shares would now have the right to elect the board.  For example, if Parent held 20M Class B shares and the other shareholders held 1M Class A shares and the shares were consolidated on a 2,000,000-for-1 basis, the fractions of shares now held by the other shareholders would be eliminated for a cash payment, and Parent would hold the 10 remaining outstanding shares.  Although more esoteric than the deferred rights of the majority shareholder in Donald Applicators to get rid of the full-voting shares in that case, the potential for this transaction was considered sufficient to give Parent control of Lossco.

Neal Armstrong.  Summary of 2012 Ruling 2011-0402571R3 under s. 251(2)(b).

CRA rejects Tawa case

In a spirited and lengthy analysis, CRA has rejected an argument that a private corporation does not have a "dividend refund" amount if, in fact, it is not eligible to receive the dividend refund because it did not file for the refund on a timely basis.  According to CRA, the Tax Court in Tawa Developments was fooled by the ordinary meaning of the word "refund" in the defined term "dividend refund" (suggesting to the Tax Court that the amount must actually be received), whereas the wording of the definition itself contains no such requirement.

Neal Armstrong.  Summary of 18 October 2012 T.I. 2012-0436181E5 under s. 129(1).

Mac's Convenience Stores - Tax Court finds that an ITC entitlement for a related financial supply arises whenever there is "some connection" between the financial supply and the registrant's commercial activities

An HST/GST provision (ETA s. 185(1)) entitles a registrant (other than a financial institution) to claim input tax credits on purchases used in the making by it of financial services, provided that the purchased goods or services "relate" to a commercial activity of the registrant.  The Tax Court has found that this test was satisfied by ABM machines of Mac's Milk which were used by it to make exempt ABM services to its customers, but which also generated additional sales at its stores.  Accordingly, it was entitled to full ITCs for the HST or GST payable on its purchases of the machines.

Hogan J. rejected CRA's submission that this rule is restricted to financial services which are "incidental or ancillary to a registrant's primary business operations."

Neal Armstrong.  Summaries of Mac's Convenience Stores Inc. v. The Queen, 2012 TCC 393 under ETA - s. 185(1) and ETA - s. 123(1) - financial service.

CRA confirms that the interest deduction followed s. 75(2) attributed income

CRA has confirmed that where an individual borrows money to acquire an income-producing property and then settles the property on an inter vivos trust to which s. 75(2) applies to attribute the property income to him or her, the individual generally will still be entitled to an interest deduction.

Neal Armstrong.  Summary of June 2012 STEP Roundtable, Q. 13 2012-0449811C6 under s. 20(1)(c).

Pluri Vox - Federal Court of Appeal finds that a corporation can employ and "control" its owner - and hire him as an independent contractor, too!

Webb J.A. found that a corporation can have the legal power to control an individual, consistent with that individual being its employee, even though that individual, as its sole shareholder, in turn had legal control of it.

Webb J.A. also noted that, as a legally distinct person, there is nothing preventing a corporation from dealing with an individual in both capacities simultaneously - as an employer and as a contractor.  For example, an individual could be both a corporate director and an independent contractor.

Scott Armstrong.  See summary of Pluri Vox Media Corp. v. The Queen, 2012 FCA 295, under s. 5.

Agellan REIT will qualify as a “true” cross-border Canadian REIT

It is anticipated by the in-progress Agellan REIT that it will qualify under the current Canadian REIT rules (which require that 75% of its revenues be from rents or mortgage interest) notwithstanding that over half of its consolidated revenues will be derived from US properties held underneath a taxable US subsidiary.  This will be an easier result to achieve under the October 24, 2012 draft amendments, which will recharacterize cross-border interest and dividends as rental revenues to the extent that is what they are derived from.

The structure also contemplates that future US property acquisitions could entail the issuance of exchangeable LP units out of a subsidiary US LP.

Neal Armstrong.  Summary of Agellan REIT preliminary prospectus under Cross-border REITs.

Income Tax Severed Letters 21 November 2012

This morning's release of 15 letters from the Income Tax Rulings Directorate is available for your viewing.

FAM REIT offering uses note and exchangeable units structure

Huntingdon is launching FAM REIT by transferring the initial properties to a subsidiary LP (FAM LP) in exchange for Class A and B units and a promissory note, and then selling the Class A units and the promissory note to the new REIT for a portion of the public offering proceeds.  The retained Class B units then becoming exchangeable units; and the REIT converts the note into Class A units.

In light of a CRA position that a partner can have only one interest in a partnership, the purpose of the note appears to be to hive cost base away from the retained Class B units.  This should work if the promissory note qualifies as debt rather than as part of Huntingdon's interest in FAM LP.

Neal Armstrong.  Summary of FAM REIT preliminary prospectus under Domestic REIT Offerings.

Trident, a private company, effects a reverse takeover of Andor using a triangular amalgamation rather than a plan of arrangement

Although most public company mergers these days utilize plans of arrangments, uncooperative minority shareholders can also be carried along on the closing date by using a triangular amalgamation without a plan of arrangement (if there is no need to be exempted from US registration requirements by the 3(a)(10) rule).  This is what is proposed in the proposed reverse takeover of Andor, a TSX-V listed micro-cap company, by Trident, a private company.  This transaction effectively is a back-door listing of Trident (which is what Andor will be called after the amalgamation).

Neal Armstrong.  Summary of Andor Circular under Mergers & Acquisitions - Triangular amalgamations.