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Crombie REIT used a s.132.2 merger and a renunciation of most of the units otherwise issuable on the merger in order to eliminate a REIT corporate subsidiary held through an LP

Crombie REIT held the units and notes of a subsidiary unit trust (Crombie Subsidiary Trust), whose principal asset was most of the partnership interests, other than exchangeable LP units held by the Empire group, in a subsidiary LP (“Crombie LP”), which held real estate and a corporate subsidiary (“CDL”).

In a 2017 reorganization, the REIT first eliminated Crombie Subsidiary Trust by setting up a unit trust (“MFT”), having Crombie Subsidiary Trust transfer its assets to MFT under s. 107.4, distributing just enough units of MFT to its unitholders for MFT to qualify as a mutual fund trust, and then instigating a s. 132.2 merger of MFT into the REIT.

The REIT also did not want CDL to be subject to potential corporate income tax. Had the REIT now held CDL directly, this would have been accomplished by incorporating a subsidiary (“MFC”), distributing relatively modest shareholdings in MFC to its unitholders sufficient to qualify MFC as a mutual fund corporation, amalgamating MFC and CDL so that Amalco also qualified as a mutual fund corporation, and then instigating the merger of Amalco into the REIT under s. 132.2 – so that the former assets of CDL were now held directly by the REIT.

A complicating factor was that, as noted, CDL was held by a partnership (Crombie LP). Accordingly, Crombie LP first transferred its CDL shares to MFC under s. 85(2) in consideration for most of the shares of MFC (so that CDL could then be vertically amalgamated with MFC to form Amalco). On the s.132.2 merger of Amalco into the REIT, Crombie LP renounced the receipt of the REIT units that otherwise would be receivable by it on the redemption of its Amalco shares. CRA ruled that Crombie LP was not required to include any amount in its income as a result of the exercise of its right of renunciation.

Neal Armstrong. Summary of Crombie REIT Circular under Other – Internal S. 132.2/107.4 Mergers.

Brunette v. Legault Joly Thiffault – Supreme Court of Canada finds that a shareholder generally cannot sue for bad tax advice provided to the corporation

A Quebec trust, whose sole asset was its investment in the holding company for a group of retirement residences companies (Groupe Melior) that became bankrupt following an ARQ assessment, sued the professional advisors of Groupe Melior on the basis that they had set up a flawed tax structure for Groupe Melior. In finding that the trust had no standing to bring this action because it was a mere shareholder, Rowe J indicated that the “the civil law produces a conclusion similar to that” under Foss v. Harbottle (1843), 67 E.R. 189 “which categorically bars shareholder recovery for faults committed against a corporation,” stating:

The corporate veil is impermeable on both sides; just as shareholders cannot be liable for faults committed by the corporation, so too are they barred from seeking damages for faults committed against it … .

There was an exception to this rule where shareholders established that there had been the breach of “a distinct obligation owed to the[m]” by the defendant and “this breach resulted in a direct injury suffered by the shareholders, independent from that suffered by the corporation.…” This was not established to be the case here. The loss suffered by the trust was precisely the loss suffered by Groupe Melior: a loss based on the net value of the seniors’ residences.

Neal Armstrong. Summary of Brunette v. Legault Joly Thiffault, s.e.n.c.r.l., 2018 SCC 55 under General Concepts – Negligence.

Boguski - Tax Court rejects the first attempt by CRA to use the expanded s. 174 application procedure

In 2013, s. 174 was expanded so that it could be used to request a determination by the Tax Court on questions involving a large group of unrelated taxpayers who entered into similar transactions with a third party. CRA sought to have the Tax Court make a determination as to the validity of Canadian development expense claims by 81 different taxpayers respecting their purchase of rights from a resource company.

D’Arcy J first excluded about half of the named taxpayers on the grounds that the Minister had failed to establish that they had filed valid notices of objection to denials of CDE for the indicated taxation years. This still left 42 taxpayers as to whom D’Arcy J determined that directing a hearing of the s. 174 question would be “significantly more expensive and time-consuming than proceedings that would otherwise occur under the Court’s Lead Case Rules” given the large number of participants, the likely confusion for the self-represented litigants and the effective requirement for them to travel to Winnipeg for a hearing rather than having any appeal held close to home. He also found that the attempted use of s. 174 by CRA was an abuse of process, in part, because it effectively amounted to an attempted end run around jurisprudence limiting the scope of Rule 58 applications.

It appears to be contemplated that the main issue will be largely decided later through the two lead taxpayers going before the Tax Court.

Neal Armstrong. Summary of Boguski v. The Queen, 2018 TCC 236 under s. 174(3).

CRA finds that costs of consultations with an aboriginal community respecting an exploration program qualified as CEE

Para. (f) of the definition of Canadian exploration expense refers to expenses incurred for the purpose of determining the extent or quality etc. of a Canadian mineral resource including “for environmental studies or community consultations.”

CRA indicated that this test would generally be satisfied respecting various expenses incurred by a Canadian exploration company in engaging with a First Nations community to obtain its support for an exploration program including funds initially advanced to the community to fund an information program, ongoing consultation expenses (e.g., of reports to the community), environmental studies as to the potential impact of the exploration program, e.g., as to species at risk, and of expenses for legally documenting arrangements agreed to with the leaders of the community during community consultations.

Neal Armstrong. Summary of 15 November 2018 External T.I. 2018-0762201E5 under s. 66.1(6) – Canadian exploration expense – para. (f).

CRA indicates that express consent to receiving T3 or T5 slips can be provided as part of the process of downloading them

In 2017-0730761I7, the Rulings Directorate indicated that, given the wording of Regs. 209(3) and (4), financial institutions cannot provide their clients with electronic copies of information slips (e.g., T3s, T5s or NR4s) on a secure website without the written or electronic consent of the clients, even where the T3s etc. have also been provided in written form (subject to a limited exception permitting the provision of T4s in electronic form).

In response to a follow-up query on this, the Directorate stated the required “consent can be granted by the Client on the website itself” and that:

where a Client signs up for online access to a secure website and downloads their tax information from the site, the express consent requirement in subsections 209(3) and (4) would be met provided the Client is duly informed and acknowledges that they are consenting to receive their information slips electronically.

This does not sound any more onerous than acknowledging that you are 19 when you buy wine online.

Neal Armstrong. Summary of 18 October 2018 External T.I. 2018-0768931E5 under Reg. 209(3).

12 further full translations of CRA French-language interpretations are available

The table below provides descriptors and links for another 12 of the 2018 APFF Roundtable items recently released by CRA, as fully translated by us. (In October, we provided full-text translations of the CRA written answers, but only summaries of the questions posed.) The Rulings Directorate made some minor additions to the final version of the answers. In particular, in Q.3 of the Financial Strategies Roundtable, CRA added two paragraphs at the end dealing with the point that an individual cannot be a source individual respecting himself.

The above items are additions to our set of 733 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2018-12-12 5 October 2018 APFF Roundtable Q. 11, 2018-0768821C6 F - Tax on Split Income Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Amount - Paragraph (e) - Subparagraph (e)(i) dividends derived from stock portfolio of Holdco excluded because stock portfolio not a related business or not a business
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Related Business - Paragraph (a) - Subparagraph (a)(i) stock market investing business of child's holdco not a related business as father not involved
5 October 2018 APFF Roundtable Q. 12, 2018-0768831C6 F - Tax on Split Income and Partnership Income Tax Act - Section 96 - Subsection 96(1.8) having non-contributing children in a family portfolio investment partnership subject to potential challenge under ss. 74.1 and 96(1.8)
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (a) - Subparagraph (a)(i) family partnership investing in designated stock exchange shares not subject to TOSI rules
Income Tax Act - 101-110 - Section 103 - Subsection 103(1.1) having non-contributing children as members of a family stock market partnership is subject to challenge under s. 103
5 October 2018 APFF Roundtable Q. 13, 2018-0778661C6 F - Tax on Split Income Income Tax Act - Section 120.4 - Subsection 120.4(1) - Arm's Length Capital no exclusion for arm’s length capital contribution where contribution derived from capital gain from related business
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Amount - Paragraph (e) - Subparagraph (e)(i) amounts not derived from a business were excluded amounts
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Shares returns to a spouse and older children from a Holdco in which they reinvested their Opco capital gains exemption could qualify as excluded amounts
5 October 2018 APFF Roundtable Q. 14, 2018-0768851C6 F - Avantage imposable découlant de l’utilisation d’un aéronef Income Tax Act - Section 15 - Subsection 15(1) shareholder benefit from corporate aircraft reduced by an interest-free loan made by the shareholder to fund its purchase
5 October 2018 APFF Roundtable Q. 15, 2018-0768861C6 F - Share exchange and statute of limitation Income Tax Act - Section 152 - Subsection 152(4) a price adjustment clause can operate re statute-barred transactions to affect a tax attribute that is used in the current year
General Concepts - Effective Date retroactive ACB adjustment under PAC to statute-barred transaction may be taken into account in a current relevant transaction
5 October 2018 APFF Roundtable Q. 16, 2018-0768871C6 F - Dépenses de bureau à domicile et d’automobile Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property depreciable property must be owned
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense payment of expenses of taxpayer by another does not preclude “incurring” by taxpayer
Income Tax Act - Section 9 - Nature of Income payment of taxpayer’s expenses by another might give rise to s. 9 or 80 inclusion
Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(g) example of proration of capped s. 13(7)(g) capital cost
Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A capital cost of co-ownership interest
5 October 2018 APFF Roundtable Q. 17, 2018-0768881C6 F - entreprise exploitée activement – revenu de location Income Tax Act - Section 125 - Subsection 125(7) - Active Business Carried On by a Corporation question of fact whether a CCPC with too many employees to have a specified investment business carries on a business
Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business principal purpose means main or chief objective
5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 1, 2018-0761521C6 F - Life insurance policy as share redempt. proceeds Income Tax Act - Section 148 - Subsection 148(7) more gain will be realized if an appreciated life insurance policy is distributed as redemption proceeds rather than a dividend-in-kind
5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 2, 2018-0765791C6 F - Tax on Split Income Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Shares - Paragraph (a) - Subparagraph (a)(i) shares of a rental property company potentially may qualify as excluded shares for TOSI purposes
5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 3, 2018-0765801C6 F - Tax on Split Income Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (e) - Subparagraph (e)(ii) deemed s. 104(21) capital gains retained their character as stock market gains
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Related Business - Paragraph (a) - Subparagraph (a)(ii) related business if children manage investment business of trust whose interest income is distributed to mother
Income Tax Act - Section 120.4 - Subsection 120.4(1.1) - Paragraph 120.4(1.1)(c) - Subparagraph 120.4(1.1)(c)(ii) s. 120.4(1.1)(c)(ii) exclusion where investment portfolio business of spousal trust had been carried on directly by deceased husband
5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 4, 2018-0765811C6 F - Tax on Split Income Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (c) - Subparagraph (c)(ii) - Clause (c)(ii)(D) no TOSI on net rental income of spousal trust on properties managed by son if excluded amounts
Income Tax Act - Section 120.4 - Subsection 120.4(1.1) - Paragraph 120.4(1.1)(c) - Subparagraph 120.4(1.1)(c)(ii) exclusion where rental portfolio of spousal trust was a directly-conducted business of deceased husband
5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 5, 2018-0761561C6 F - Rachat de parts en cas d’invalidité

Kinder Morgan reduces its shares’ PUC by more than the PUC distribution by it of the Trans Mountain pipeline sales proceeds

As a result of its indirect 30% interest in the Trans Mountain pipeline system, Kinder Morgan realized $1.2 billion on the sale of the system to the federal government for $4.5 billion. Kinder Morgan will distribute that sum to its shareholders as a stated capital (and paid-up capital) distribution. The exclusion from deemed dividend treatment under s. 84(4.1) for a one-off distribution of recently-received sales proceeds is being relied upon.

Quite unusually, the stated capital reduction (of $1.45 billion) exceeds the $1.2 billion stated capital distribution amount, so that the stated capital of the shares will be reduced to approximately $0.33 billion. This is being done in order to not be subject to potential solvency test restrictions under ABCA in declaring dividends. Public company PUC is useless – except when it is useful.

Neal Armstrong. Summary of Kinder Morgan Canada Circular under Spin-offs & Distributions – ss. 84(4.1)(a) and (b) distributions of proceeds.

Cameco implicitly rejected the OECD cash box notion

Cameco effectively rejected the highly questionable “cash-box” notion of the OECD, which implicitly makes an investment manager the majority partner in the property being managed and reduces the interest of the party whose capital is at risk to a “risk-free” return – and thus ignores the discipline of investment markets reflected in arrangements that see the best private equity managers earning no more than a 20% “carry”.

[T]he issue is squarely dealt with in paragraphs 455 and 456 of the judgment where taxpayer expert witnesses were quoted as saying (in paragraph 455), "Thus to argue, as [the Canada Revenue Agency] does, that the provision of administrative services to investors like CEL who supply risk capital is the equivalent of bearing the risks that capital is subject to is to denigrate the role of risk bearing while putting the engagement in routine functions on a pedestal," and (in paragraph 456), "Even if the CRA's assertion that CCO monitored and managed CEL's price risk is true, this is irrelevant to the question as to who bore the price risk. The CRA confuses risk monitoring with risk-bearing."

Neal Armstrong. Summary of Nathan Boidman, Cameco and Cash-Boxes,” 19 December 10 2018 letter to Tax Notes International under s. 247(2).

CRA treats non-resident LPs as conduits for purposes of Treaty interest withholding relief

Four non-resident LPs with the same non-resident corporate general partner (GP Co) collectively control Canco through their majority ownership of its shares and have also made unsecured interest-bearing loans to Canco. The limited partners are unrelated investors who deal at arm’s length with each other and with GP Co as a factual matter, and include both Canadian residents and residents of the U.K. for purposes of the Canada-U.K Treaty (in each case holding a relatively small limited partnership interest).

CRA ruled that Canco was not required to withhold on the U.K. partners’ share of each interest payment since each such share was exempted under Art. 11(3)(c) of the Canada-U.K Treaty, which referenced interest arising in one contracting state and paid to a beneficial owner in the other contracting state who dealt at arm’s length with the payer.

This ruling effectively accepted that each U.K. limited partner dealt at arm’s length with Canco notwithstanding that it was part of a grouping that might be regarded as collectively dealing in concert (through a common general partner) with Canco. The domestic arm’s length exemption in s. 212(1)(b)(i) was not discussed. CRA might have considered the domestic exemption not to be available because a partnership is treated as a person for such purposes under s. 212(13.1)(c), and the four partnerships likely dealt in concert respecting their joint Canco investment.

Neal Armstrong. Summary of 2017 Ruling 2017-0712731R3 under Treaties – Income Tax Conventions – Art. 11.

CRA finds that an estate is a blocker for accessing the TOSI excluded share exemption

The definition of “excluded amount” in the s. 120.4 tax on split income (TOSI) rules excludes the income of an individual aged 24 from excluded shares of the individual. The definition of “excluded shares” of a specified individual refers to shares “owned” by the individual that satisfy the three tests in paras. (a) to (c) including the 10% of votes and value test in para. (b).

CRA found that where an estate received a deemed dividend on the redemption of preferred shares of a corporation carrying on an investment business, that dividend when distributed by it to the family beneficiaries (age 24 or older) did not qualify in their hands as excluded amounts because they were not the owners of the preferred shares. It was irrelevant that the preferred shares satisfied the 10% of votes and value test, and that each beneficiary also directly held shares of the corporation that satisfied the 10% of votes and value test.

Neal Armstrong. Summary of 7 November 2018 External T.I. 2018-0777361E5 under s. 120.4(1) – excluded shares and s. 120.4(1.1)(b).