News of Note
Income Tax Severed Letters 26 July 2017
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a deposit to be used in the construction industry was not a mineral deposit
Capital cost allowance may be claimed under Sched. V for an industrial mineral mine, which excludes a “mineral deposit” – which is defined to include a “base or precious metal deposit” and “a mineral deposit in respect of which the Minister of Natural Resources has certified that the principal mineral extracted is an industrial mineral contained in a non-bedded deposit.” IT-492 states that “industrial mineral” means “a non-metallic mineral capable of being used in industry.” In explaining the denial of a certification request respecting a deposit of nephrite (a type of jade), CRA stated:.
The Minister of Natural Resources has advised that the principal mineral, nephrite, to be extracted from the Properties is not an industrial mineral contained in non-bedded deposits as it will be used as a construction material.
See also 2016-0674541E5.
Neal Armstrong. Summary of 16 June 2017 External T.I. 2016-0673551E5 under s. 248(1) – mineral resource.
Six further full-text translations of CRA APFF Roundtable items are available
Full-text translations of six of the APFF Roundtable items released on December 10, 2014 are listed and briefly described in the table below.
These (and the other translations covering the last 31 months of CRA severed letter releases) are subject to the usual (3 working weeks per month) paywall.
CRA ruling describes a structure for MFT trailer fees to be funded out of increased management fees charged to an indirect real estate subsidiary LP of the MFT
CRA ruled respecting the creation of an additional class of “Class A” units of a mutual fund trust (the “Trust”) - which would essentially have identical attributes to those of the existing units except that they would indirectly bear all of the trailer fees paid to securities dealers, who would only sell the Class A units to further subscribers and not the existing units. CRA ruled that this amendment (which would be made by the trustee without unitholder approval on the grounds that there was no effect on the value of the existing units) would not result in a disposition at the trust or unitholder level, or in the application of s. 104(7.1).
The trailer fees respecting the Class A were to be funded out of additional management fees charged by the general partner of an indirect real estate subsidiary LP of the Trust to that LP, with the resulting reduction in distributions paid by that LP up the chain to the Trust being tracked so as to result in a pro tanto reduction in the distributions paid on the Class A units relative to the existing units. This general partner was controlled by the Trust corporate trustee. CRA did not comment on the trailer fees effectively being expensed at the operating LP level.
Neal Armstrong. Summary of 2016 Ruling 2015-0612931R3 under s. 248(1) – disposition.
The B2B connectivity tests do not require that the two legs of a B2B arrangement be put in place contemporaneously
The back-to-back loan rules attempt inter alia to catch situations where a particular non-resident indirectly funds a debt of a Canadian borrower by granting certain security interests or property rights to an intermediary (instead of lending to the intermediary). The concept of “specified right” which is used to this end now appears to target security interests and property rights that the intermediary can monetize and use to fund the particular debt to the taxpayer. However, if the Canadian subsidiary and foreign parent and sisters enter into a multiparty credit agreement where all parties guarantee the facility, pledge their assets and borrow, except that the subsidiaries do not guarantee the foreign parent's borrowings for foreign tax reasons, the requirements for the exception to the definition of "specified right" may not be satisfied.
The revised B2B rules catch a loan to the immediate funder by a partnership.
The B2B rules contain connectivity tests to link the particular loan made to the Canadian taxpayer by an intermediary to a loan or equity funding by (or royalty arrangement with) an intermediary.
[T]he connectivity tests do not require that the two legs of a back-to-back arrangement be put in place at or around the same time. Therefore, each time a Canadian entity receives funding of any sort, it will have to trace the historical origin of that funding, even if one leg of the back-to-back arrangement was put in place a long time ago and the funds in the intermediary have been reinvested a number of times.
Neal Armstrong. Summaries of Jason Boland and Christopher Montes, "A Detailed Review of the Back-to-Back Loan Rules," 2016 CTF Annual Conference draft paper under s. 18(5) – specified right, s. 18(6)(c)(i), s. 212(3.8) – relevant funder and specified share, s. 212(3.21), s. 212(3.6)(a), s. 212(3.91) and s. 15(2.18).
Sequencing the acquisition of control on a recapitalization can maximize tax attributes
A Canadian public company (Canco) will be recapitalized so that the provider of debtor-in-possession financing will end up holding 2/3 of the common shares having a fair market value equaling that of the DIP financing provided by it, and most of the balance of 1/3 of the common shares will be received by the holders of the U.S.-dollar bonds, who thereby will recognize a 90% loss in U.S.-dollar terms – or less than that in Canadian-dollar terms.
If the transactions are structured so that the acquisition of control by the DIP financier occurs first (or is deemed to occur first under s. 256(9)), Canco will realize the accrued FX loss on the bonds under s. 111(12). If the bonds are instead settled first, s. 80(2)(k) will effectively prevent realizing an FX loss on the 90% of the bonds that is forgiven, thereby resulting in fewer tax attributes recognized by Canco.
As background to the extension of the debt-parking rules by s. 39(2.01), many Canadian companies had substantial accrued FX gains on their U.S.-dollar debt, particularly debt originally issued in 2001 or 2002, and which matured in 2011 and 2012, when the Canadian dollar had appreciated to around parity.
Neal Armstrong. Summaries of Carrie Aiken and Johnson Tai, "Debt Restructuring Transactions – Issues, Strategies and Trends," 2016 CTF Annual Conference draft paper under s. 80(2)(k), s. 39(2.02) and s. 248(1) - disposition.
CRA states that a non-resident lender consent fee is not an administration fee and treats non-resident dealer board attendance as services rendered in Canada
Canco paid “consent fees” (calculated as a percentage of the amount owing) in order to obtain the consent of arm’s length non-resident lenders to a sale of its shares to a non-resident purchaser. Before finding that the fees were not subject to Part XIII tax as a management or “administration” fee or charge, or on any other ground, the Directorate noted that at the time of the original introduction of s. 212(1)(a), the Minister of Finance had stated (even before getting to the exclusions in s. 212(4)) that “a management or administration fee or charge is to be regarded as an amount paid for advice or direction pertaining to the operation or administration of a company, not including an amount paid for services to an independent firm.”
Canco had also paid fees of a non-resident dealer for assistance in structuring the transaction, finding purchasers, evaluating their offers and coordinating due diligence. Regarding Reg. 105 withholding, CRA stated that “it would appear that at least some of the services, particularly meeting with the Board of Directors would be provided in Canada,” and referred to its comment in IC 75-6R2, para. 32 that “The portions allocated to the services to be performed inside and outside Canada must be clearly expressed either within the contract or through the related information and documents.”
Neal Armstrong. Summaries of 30 March 2017 Internal T.I. 2016-0636721I7 under s. 212(1)(a) and Reg. 105.
Montminy – Federal Court of Appeal finds that employees enjoyed the ½ deduction on exercising their stock options notwithstanding an immediate sale of the acquired shares to the controlling shareholder
When a third-party purchaser agreed to acquire all the assets of Opco, the management employees agreed with the 100% shareholder of Opco (“Holdco”) that on the asset sale closing date, they would exercise their options to acquire common shares of Opco and immediately sell their newly-acquired shares to Holdco for an agreed cash sale price.
The Crown accepted that this right to sell their shares to Holdco was a fair market value liquidity right described in Reg. 6204(2)(c), so that the shares were not prevented from being prescribed shares under Regs. 6204(1)(a)(iv) and (vi) (re right for their shares to be acquired by a specified person, i.e., Holdco). However, D’Auray J in the Tax Court had accepted the Crown’s submission that the shares were tainted under Reg. 6204(1)(b).
In allowing the taxpayers’ appeal, Noël CJ found that Reg. 6204(2)(c), by providing that the taxpayers’ right to sell their shares to Holdco was to be ignored for purposes of Reg. 6204(1), had the effect of also deeming there to be no reasonable expectation under Reg. 6204(1)(b) of such an acquisition occurring within two years of the options’ exercise. He also found that providing the ½ deduction under s. 110(1)(d) to the taxpayers accorded with the broader context of the stock option rules. In particular, the taxpayers had been fully at risk during the lengthy period of their holding of their options to fluctuations in Opco’s value.
Neal Armstrong. Summary of Montminy v. Canada, 2017 FCA 156 under Reg. 6204(1)(b).
CRA considers the possibility that a portion of redemption proceeds could be treated as a dividend under Barbados corporate law
The s. 90(2) rule, which deems a pro rata distribution received on a foreign affiliate share to be a dividend, does not apply to a “distribution made…on a redemption …of the share.”
Canco held the preferred, but not the common, shares of a Barbados International Business Company (“FA”), and its preferred shares were redeemed. Although the relevant facts are mostly redacted, it would appear that the resolution pursuant to which FA redeemed the shares provided that a portion of the proceeds paid on the redemption was a dividend, and Canco apparently relied on this wording rather than making a s. 93(1) election. The Directorate stated:
If there is only, as a matter of law, a redemption and cancellation of shares, or if there is no conclusive evidence as to whether there is, in part, a dividend, we would generally view all such amounts as having been received as proceeds from the disposition of the… Shares, and no amount as having been received as a dividend.
This seems to imply that the Directorate was amenable to the possibility that, with the right corporate-law treatment, the proceeds could in part be a dividend even though they were all paid “on a redemption …of the share[s].”
The Directorate also stated:
If there is, in part, a dividend… to the extent the purpose of issuing the...Shares is to skew exempt surplus to the Canadian shareholder…consideration [should] be given as to the potential application of subsection 95(6) and/or subsection 245(2).
Neal Armstrong. Summary of 11 April 2017 Internal T.I. 2016-0670541I7 under s. 90(2).
Income Tax Severed Letters 19 July 2017
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.