News of Note
Epsilon is proposing to continue from Alberta to Delaware
Email this ContentEpsilon is an Alberta corporation holding, through US subsidiaries, a profitable U.S. oil and gas business. It is proposing to continue out of Canada and be "domesticated" as a Delaware corporation pursuant to the continuance “export” provisions in the ABCA and the domestication provisions in the Delaware General Corporation Law. Although this will result in a deemed disposition of all its property (s. 128.1(4)(b)) and an exit tax calculated at 5% of NAV minus PUC (s. 219.1), management does not anticipate any material Canadian income tax under these rules based on current values and Canadian tax attributes including significant loss carryforwards and (it would appear) significant paid-up capital for its shares.
U.S. shareholders holding less than 10% of its shares can elect, in lieu of recognizing gain, based on the FMV of their shares, to include in income as a deemed dividend the “all earnings and profits amount” attributable to their shares, which management estimates to be nil.
As discussed in a previous post on another transaction, the continuance of Gastar Exploration (with a U.S. natural gas business) from Alberta to Delaware was regarded from a U.S. tax perspective as entailing a transfer by Gastar of all its assets to the new Delaware corporation (Gastar Delaware), followed by a distribution by Gastar of Gastar Delaware to its shareholders. This distribution step was problematic as Gastar Delaware was a United States real property holding company for FIRPTA purposes. Notwithstanding that essentially the only properties of Epsilon are its U.S. oil and gas interests, its disclosure indicates that the domesticated Epsilon is not anticipated to be a USRPHC.
Neal Armstrong. Summary of Epsilon Energy Proxy Circular under Other - Continuances/Mergers.
14 further full-text translations of CRA interpretations are available
The table below provides descriptors and links for the Technical Interpretation released last week and for 13 of the October 2017 APFF Roundtable questions and answers released two weeks ago (Q.6 to Q.18), as fully translated by us.
These (and the other full-text translations covering the last 4 1/2 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
The unitholders of a U.S. LLC (BSR) are proposing an IPO though a TSX-listed holding MFT that will be a REIT for Code purposes
A closely-held Delaware LLC with a portfolio of apartment buildings in the southern U.S. appraised at U.S.$890M (“BSR”) is proposing to effectively do an IPO in Canada. This would occur as follows:
- a newly-formed Ontario s. 108(2)(a) unit trust (the “REIT”) will complete a relatively modest IPO in Canada (for about U.S.$135M) with a view to trading on the TSX
- the REIT will use those proceeds to fund a newly-formed Delaware “C Corp” subsidiary of the REIT (“US Holdco”) which, in turn will fund a new wholly-owned Delaware LLC subsidiary (“MergerSub”)
- MergerSub will be merged into BSR with BSR as the survivor
- on the merger, US Holdco will be issued Class A units of BSR, and the existing BSR unitholders will receive Class B exchangeable units of BSR (valued at around U.S.$270M)
Although the REIT will be deemed by the U.S. anti-inversion rules in Code s. 7874 to be a U.S. corporation, it is expected to qualify as a REIT for Code purposes. The disclosure does not discuss whether it will also qualify as a REIT for ITA purposes, but states that it is not expected to be subject to SIFT tax by virtue of not holding any non-portfolio property.
Neal Armstrong. Summary of BSR REIT preliminary prospectus under Offerings – REIT and LP Offerings - Cross-Border REITs.
CRA states that the FMV of a free parking spot is a taxable benefit unless there is “regular” business use
CRA accepts that there is no taxable benefit to an employee from a free parking spot where it is provided for business purposes, i.e., the employee’s car must be used “regularly” in performing the employment duties. CRA does “not consider that parking offered to facilitate working irregular or extended hours is parking for business purposes.”
Any taxable benefit is computed based on the FMV of the spot, “i.e., the market price for a similar space in the surrounding area having the same conditions of use as for the space provided by the employer.”
Neal Armstrong Summary of 24 January 2018 External T.I. 2016-0645911E5 F under s. 6(1)(a).
Markou – Tax Court of Canada indicates that donative intent no longer is required for split gifts
The Ontario and Quebec appellants had engaged in the same leveraged donation program as to which the Federal Court of Appeal in Maréchaux had confirmed that none of the donations (even the cash portion) qualified as a “gift” for charitable credit purposes. In the Markou case, Paris J found that “donative intent in civil law, as in common law, is always an essential element of a gift, even a partial gift,” whereas here “there was just one interconnected transaction and no part of it can be considered a gift that was given in expectation of no return.”
One of the taxpayers’ arguments was that consent judgments had been issued, respecting donations made after the subsequent introduction of the split-gifting rule in s. 248(30), that accorded a credit for the cash portion of donations made under a leveraged donation program. In rejecting the proposition that this entailed an implicit recognition that there was “donative intent” for such cash components, Paris J stated:
[I]t appears that where the 80% threshold [in s. 248(30)] is not crossed, the lack of donative intent is no longer a bar to allowing charitable donation tax credits for transfers to qualified donees.
Neal Armstrong. Summaries of Markou v. The Queen, 2018 TCC 66 under s. 118.1(1) – total charitable gift and s. 248(30).
Travel Document Service – Court of Appeal of England and Wales finds that an anti-avoidance provision based on “one of the main purposes” for holding a loan applied to a deemed loan
A British taxpayer (TDS) used a total return swap to cause its share investment in a subsidiary (LGI) to be deemed to be a loan. However, its hoped-for tax benefit was denied by an anti-avoidance provision that applied if “one of the main purposes” for being a party to a loan relationship was to secure relief from tax. In rejecting TDS’s submission that the anti-avoidance provision should only be applied to actual loans and not deemed loans, Lord Justice Newey referred to the dictum in Marshall v. Kerr (repeated in many subsequent cases) that “because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so.” This then meant that what was to be evaluated under the anti-avoidance rule was the purposes for which TDS held its shares of LGI.
In this regard, TDS emphasized that it had held its TDS shares long before entering into the swap and a related novation contract. In rejecting this contention, Lord Justice Newey stated:
Had the tax advantage in view been small, there might have been scope for argument as to whether an intention to use the shares to achieve it implied that obtaining the advantage was now a main purpose of holding the shares. In fact, however, the hoped-for gain was large both in absolute terms (more than £70 million) and relative to the apparent value of TDS (some £280 million).
He also rejected HMRC’s submission that "’main’ … means ‘more than trivial’," stating:
A purpose can be "more than trivial" without being a "main" purpose. "Main" has a connotation of importance.
Neal Armstrong. Summaries of Travel Document Service & Ladbroke Group International v Revenue & Customs (Rev 1) [2018] EWCA Civ 549 under Statutory Interpretation – Interpretation Provisions and s. 83(2.1).
CRA reverts to allowing employees to purchase merchandise at cost
In Folio S2-F3-C2, CRA stated:
When an employee receives a discount on merchandise because of their employment, the value of the discount is generally included in the employee’s income under paragraph 6(1)(a). The discount may be provided by the employer or by a third-party. The value of the benefit is equal to the fair market value of the merchandise purchased, less the amount paid by the employee. However, no amount is included in the employee’s income if the discount is also available to the general public or to specific public groups. [emphasis added]
This Folio was then removed from the CRA site with a notation that it was under review.
A Ministerial letter mailed in March states:
[T]he CRA has a longstanding administrative policy that employee discounts on merchandise are generally not taxed. This policy is still in place and is explained in Guide T4130.
Guide T4130 currently states that employee merchandise discounts generally are not taxable benefits unless:
You [the employer] make an arrangement that allows an employee to buy merchandise (other than old or soiled merchandise) for less than your cost
Until recently, the word we have bolded referred instead to “fair market value.”
In a similar vein, another March Ministerial letter states:
The media reports also led to confusion about the taxation of subsidized meals for employees. The CRA does not consider these meals a taxable benefit if the employee pays a reasonable charge. A reasonable charge is one that covers the cost of the food, its preparation, and service.
Neal Armstrong. Summary of 5 March 2018 Ministerial Correspondence 2017-0726641M4 under s. 6(1)(a) and of 21 March 2018 Ministerial Correspondence 2017-0729161M4 under s. 6(1)(a).
Le – Tax Court of Canada finds that an individual whose designation as a first director was defective, and who did not perform a director’s role, was not liable qua director
The taxpayer had intended to form a partnership with another party, who was under the misapprehension that a corporation was required in order to form a partnership, and drafted documents for her to sign that reflected this confusion. Russell J found that the taxpayer was not a de jure director of the corporation, notwithstanding that she had been named in the notice of articles as a first director. She had not provided a written consent to be a director and she also was not an “incorporator,” whose definition in the B.C. Business Corporations Act referenced her signing an “incorporation agreement.” The only relevant agreement that she had signed was found by Russell J to instead be a partnership agreement.
She also was not a de facto director, Russell J stated:
Jurisprudence reflects that the concept of de facto director should be limited to persons who hold themselves out as directors.
The taxpayer in fact “engaged in no acts of management … let alone any actions specific to a director.”
Accordingly, she was not liable for assessments under the ITA and ETA director’s liability sections.
Neal Armstrong. Summary of Le v. The Queen, 2018 TCC 65 under ITA s. 227.1(1).
Income Tax Severed Letters 18 April 2018
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA cross-border butterfly ruling letter contemplates two successive permitted exchanges and comments on property-type issues
A recently-released 2016 ruling letter - respecting the spin-off by a foreign public company (Foreign Pubco) of a newly-formed non-resident subsidiary (Foreign Spinco) – describes the butterflying of the Canadian spin business of Canadian DC (which is a direct sub of “Forco 2” and indirect sub of Foreign Pubco) to Canadian TC (which is the child of Foreign DC and a grandchild of Forco 2.) Immediately before this butterfly transfer, Canadian TC acquires its special shares in Canadian DC through a three-party exchange arrangement between Canadian TC, Forco 2 and Foreign DC, although it is not done this way for ITA reasons.
Foreign DC is then distributed up the chain to Foreign Pubco. Foreign Pubco then drops Foreign DC into a new subsidiary (Foreign TC) of a newly-formed LLC subsidiary of Foreign Pubco (New LLC – to which other significant foreign assets already have been contributed) pursuant to a three-party exchange agreement under which Foreign Pubco transfers Foreign DC directly to Foreign TC, Foreign TC issues shares to New LLC, and New LLC issue units to Foreign Pubco. Both this triangular exchange and the previous one are expressed to occur as “permitted exchanges” in accordance with the formula in (b)(iii) of the s. 55(1) definition.
The ruling letter includes detailed guidance respecting the classification of the transferred and retained property of Canadian DC amongst the three types of property (cash and near cash, investment and business property) and the identification of liabilities to be netted against them, including:
- Positive and negative balances under cash pooling arrangements are to be determined on a net basis and treated as cash or near cash.
- 100% of properties rented by Canadian DC that are majority-used in its Canadian businesses are treated as business assets notwithstanding that portions of the properties are subleased to third parties at a loss.
- Canadian DC and Canadian TC can decide between themselves as to what portion of a term loan receivable by Canadian DC from another Canadian affiliate (that is to be included in the property transferred to Canadian TC) is to be treated as a cash and near cash asset, as contrasted to an investment asset – and there also is flexibility to balance out the property-type mix respecting the allocation of liabilities to net receivable balances.
- Deferred revenue obligations or liabilities under supplemental retirement plans will not be treated as liabilities, and net pension plan assets will not be considered as property; whereas net pension plan liabilities will be treated as liabilities.
Neal Armstrong. Summary of 2016 Ruling 2015-0616291R3 under s. 55(1) – distribution.