News of Note

CRA confirms that the s. 156 GST/HST election may be available on an asset transfer to a Newco

In its new Memorandum on the intra-group election for nil consideration (s. 156), CRA indicates that it is available for the transfer of assets by an existing exclusively-commercial registrant to a "Newco" subsidiary, provided that before the transfer the Newco is doing something in connection with a proposed exclusive commercial activity.  If so, it qualifies as engaging in that commercial activity, and can register, make the election and receive the assets free of GST or HST.  This can be useful if there are issues as to the availability of the s. 167 election on a drop-down transaction.

Neal Armstrong.  Summary of GST/HST Memorandum 14.5 "Election for Nil Consideration" September 2012 under ETA, s. 156(1).

Nord Gold offer for High River is structured to avoid the new foreign affiliate dumping rules

Nord Gold N.V., which currently holds about 75% of the shares of High River Gold Mines Ltd. (a Canadian TSX-listed company with Russian and African mining subsidiaries), is making a direct offer for the remaining High River shares of the public in exchange for cash or Nord Gold GDRs, rather than using a Canadian Acquisitionco.  This avoids engaging the indirect acquisition rules under the new foreign affiliate dumping rules (in draft s. 212.3(10)(f)).

Consistently with there being no Acquisitionco, the Canadian tax disclosure contemplates that any subsequent acquisition transaction might take the form of the acquisition of the untendered shares for cash or Nord Gold GDRs under a plan of arrangement rather than those shares being converted and redeemed under an amalgamation squeeze-out.

Neal Armstrong.  Summary of Nord Gold offer under Mergers and Acquisitions - Cash and Equity Offers.

CRA finds that stock option benefits are paid for US Treaty purposes by a US employer that reimburses its Canadian parent which issued the stock options

Under the post-2008 version of Article XV of the Canada-U.S. Income Tax Convention, remuneration (including stock option benefits) received by a U.S.-resident employee in respect of employment exercised by him or her in Canada and exceeding Cdn.$10,000 will only be exempt from Canadian tax if the individual was present in Canada for less than 183 days during various relevant 12-month periods and this remuneration was not "paid by, or on behalf of" a resident of Canada (and is not borne by a Canadian permanent establishment).

CRA considers that where the Canadian parent with the employee stock option plan is reimbursed by its U.S. subsidiary, as "the true and only" employer of the U.S. employee, for the amount of the stock option benefit arising on exercise, the U.S. subsidiary will qualify as the person who has paid the remuneration in question (the stock option benefit), so that such benefit will be exempt under the Convention.  However, as the payer of this remuneration, the U.S. subsidiary will "generally" be liable for penalties and interest under ss. 227(8) and (8.3) if it did not remit Canadian source deductions on the stock option benefit (computed per s. 153(1.01)(a) net of any s. 110(1)(d) deduction) without the employee first obtaining a source deduction waiver under s. 153(1.1).

CRA also notes that their method of computing the amount of the stock option benefit for domestic purposes (under s. 115(1)(a)(i)) is different from the methodology in Annex B  to the Fifth Protocol to the Convention - and that the domestic method should be used if this produces a lower computed benefit than the Treaty method.

Neal Armstrong.  Summaries of 6 July 2012 Memorandum 2012-0440741I7 under Treaties - Article 15ITA - s. 153(1)(a) and ITA s. 115(1)(a)(i).

CRA rules on split-up reorganization of mutual fund trust

CRA has ruled that the rollover in s. 107.4(3) would apply where the unitholders for one class of units of a mutual fund trust (the "Exchanging Unitholders") become the sole unitholders of a new unit trust.  This is accomplished by a proportionate part of each of the investments of the old fund being transferred to the new fund (but with the adjustments contemplated in s. 107.4(2.1) for fractional shares), and the Exchanging Unitholders surrendering their units of the old fund and receiving units of the new fund.

The effect is approximately similar to a split-up butterfly of the old fund (but with a proportionate split-up of each investment rather than merely of the three types of property).

Neal Armstrong.  Summary of 2012 Ruling 2011-0428321R3 under s. 107.4(1).

CRA permits deduction of rents on a due-date basis for step-down lease

In reviewing a "step-down" lease (i.e., where the annual rents decreased for the later years), CRA concluded that the higher rents for the inital years did not represent payments of rent in respect of the subsequent years, so that s. 18(9) did not require deferral of the higher deductions for the inital years.

Neal Armstrong.  Summary of 27 August 2012 Memorandum 2012-0442831E7 under s. 18(9).

1207192 Ontario Inc. - Federal Court of Appeal finds that, in a GAAR analysis, the purpose of a transaction is determined objectively

In a companion case to Triad Gestco involving a similar loss-realization transaction (see previous post), the taxpayer's principal made a further argument that, because the series of transactions was implemented with the intention of giving him protection from creditors, and because he believed that "each and every step in the plan was essential" to effect such protection, no transaction in the series was aimed at achieving a tax benefit (and therefore was not an avoidance transaction).

Sharlow J.A. affirmed the trial judge's finding that at least one of the transactions in the series did not in fact advance any kind of creditor protection plan, and stated that what is required in the "avoidance transaction" branch of analysing  the general anti-avoidance rule is "ascertaining objectively the purpose of each step by reference to its consequences – rather than on the basis of the subjective motivation of Mr. Cross, or his subjective understanding of what may or may not have been required to achieve creditor protection."

Scott Armstrong.  Summaries of 1207192 Ontario Limited v. The Queen, 2012 FCA 259 under s. 245(3) and s. 245(4).

Triad Gestco - Federal Court of Appeal uses GAAR (and Ramsay) to reinvigorate the economic substance doctrine

In Shell, the Supreme Court indicated that "the economic realities of a situation [cannot] be used to recharacterize a taxpayer's bona fide legal relationships."  Its Canada Trustco decision on the general anti-avoidance rule dealt with circular transactions under which: the American owner of trailers retained the economic incidents of their ownership; but through lease defeasance and prepayment techniques, the Canadian taxpayer was able to legally acquire the trailers without injecting significant net equity or taking on any real risk.  The Court found that these economic realities did not prevent the taxpayer from claiming capital cost allowance on the trailers.

In Triad Gestco, the Federal Court of Appeal applied the Ramsay principle - that the capital gains system is intended to allow relief only for real economic losses and not "paper" losses -  to deny the recognition of a capital loss by a taxpayer which had not suffered any economic loss.  Accordingly, the transactions' "economic realities" informed their GAAR characterization.

Neal Armstrong.  Summary of Triad Gestco Ltd. v. The Queen, 2012 FCA 258 under s. 245(4).

GlaxoSmithKline - Supreme Court of Canada finds that an offshore affiliate could potentially charge a premium for branded (non-generic) drugs in light inter alia of the OECD Transfer Pricing Guidelines

The previous version of Canada's statutory transfer-pricing rule effectively was engaged by the payment by a Canadian taxpayer to a non-resident affiliate of "an amount greater than the amount...that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm's length...."  The Canada Revenue Agency applied its version of the "CUP" method under this rule to reduce the deduction of a Canadian distributor, for a branded drug ingredient which it bought from an off-shore affiliate, to the much lower price at which generic drug distributors were purchasing the same drug in unbranded (generic) form in arm's length transactions.

Rothstein J. found that it was appropriate to take into account that, even if the taxpayer had been dealing at arm's length with the group members, it very well might have been required, under a licence to use the brand, to pay a higher price than the generic price for the ingredient given that it was distributing the related drug in Canada in branded form - and, in fact, the taxpayer had been required to enter into a licence with these terms with a second offshore affiliate which held the brand rights.  Rothstein J. also indicated that he thought this approach was consistent with the OECD Transfer Pricing Guidelines, which required that, even in the context of a transaction-by-transaction transfer pricing approach, regard must be had for the "economically relevant characteristics" of the arm's length and non-arm's length circumstances to ensure they were "sufficiently comparable."  He referred the dispute back to the Tax Court for a redetermination in light of these broader considerations.

Neal Armstrong.  Summary of GlaxoSmithKline Inc. v. The Queen, 2012 SCC 52 under s. 247(2).

Firm Capital uses Plan of Arrangment on micro-cap TSXV company to launch a REIT

In the resource sector, it is common for promoters to arrange for the take-over a micro-cap company that already has a listing, thereby avoiding an IPO.  The Firm Capital Property Trust (the "Trust") is an interesting variation on this type of transaction.

An existing micro-cap TSXV-listed company will raise cash by selling its only asset and closing a private placement, and will also issue shares to the new Trust in exchange both for units of the Trust and for cash, and then will redeem out all its common shareholders (other than the Trust) in consideration for cash or the transfer to them of the Trust units.  The Trust is intended to qualify as a TSXV-traded REIT.

Neal Armstrong.  Summary of ISG Circular under S. 84(3) Redemption Spin-offs.

CRA indicates that fees to a non-resident for ongoing software upgrades do not qualify as copyright royalties

In accordance with the Syspro decision (in which a tax court judge found that copyright entails distribution rights), CRA indicated that fees paid to a non-resident for the exclusive rights to distribute and sublicense software in Canada are exempt from Part XIII tax, pursuant to s. 212(1)(d)(vi).  However, CRA also suggested that fees for ongoing upgrades and support are service fees, and would not fall within s. 212(1)(d)(vi).

Given that software upgrades are themselves software, and therefore accorded copyright protection, it is not clear that ongoing upgrade fees should be excluded from s. 212(1)(d)(vi).  CRA's position appears to be based on the notion that fees for "upgrades and support" are predominantly for support services.  However, sophisticated "support" tickets are often bug reports and feature requests, which would themselves culminate in new, copyrighted software patches.

Scott Armstrong.  Summary of 23 August 2012 T.I. 2011-0427181E5 under s. 212(1)(d)(vi).