News of Note

Former Chief Justice Bowman thinks that “a ‘bare trustee’ is an agent, not a trustee,” and that “no one can legally be a trustee and an agent at the same time,” so that the statement adopted in Trident Holdings that “a person may be both agent of and trustee for another,” was incorrect (although the same passage went on to acknowledge that in a bare trust “it is the agency relation that predominates.”) Accordingly, “judges, when faced with something called a ‘bare trustee’, have to make up their minds and decide which side of the line the entity falls on” and can’t say "maybe both".

Neal Armstrong. Summary of Donald G.H. Bowman, “Bare Trusts and Nominee Corporations,” Tax Topics (Wolters Kluwer), August 11, 2016, No. 2313, p. 1 under s. 104(1).

CRA considers that a s. 162(7) penalty for failure to file a T1135 form can be assessed beyond the normal reassessment period (or, under s. 152(4)(b.2), beyond the normal reassessment period plus three years where the taxpayer did not report income from specified foreign property in the relevant return) but, in such a case, CRA would have to “prove” that “although that error may have been made in good faith, it was an error that a prudent and conscientious person would not have made.”

Neal Armstrong. Summary of 26 May 2016 Alberta CPA Roundtable, 2016-0645001C6 under s. 152(4)(a)(i).

When Foreign Pubco is planning to spin off some of its assets in the form of Foreign Spinco, there will be various points to consider respecting a potential preceding butterfly transfer of the Canadian spin-off assets by a Canadian subsidiary (DC) to a transferee corporation subsidiary of Foreign Spinco (TC), including:

1. Other "spin" assets would need to be contributed to Foreign Spinco before the butterfly of the Canadian "spin" business assets, in order to ensure that the Foreign Spinco shares never derived 10% or more of their FMV from the TC shares.
2. Given the relatively narrow meaning accorded to "reorganization" by CRA, in the context of a cross-border butterfly, one need only ensure that the series of transactions or events does not include prohibited transactions or events described in 55(3.1)(a) or 55(3.1)(b), “and the continuity of interests rules in paragraphs 55(3.1)(c) and (d) should be largely irrelevant.”
3. A "reverse" foreign spin-off, where the "keep" assets are butterflied to TC as part of the usual three-party share exchange and the Foreign Spinco that is distributed to the Foreign Pubco shareholders is the existing shareholder of DC, likely will not work – unless, for example, Foreign Spinco held the DC shares through a single purpose foreign holding company.
4. The standard three-party exchange mechanics do not accommodate the foreign shareholder transferring the DC shares on a s. 85 rollover basis, so that it is problematic if the DC shares are taxable Canadian property with an accrued gain.
5. Although CRA does not believe that a transaction can qualify as a "permitted exchange" if preferred shareholders of DC do not participate in the butterfly, it nonetheless may be that the FMV of the Foreign Spinco shares should be conisdered to "approximate" the amount determined under the "permitted exchange" formula where this difficulty arises.
6. A one-way cash adjustment mechanism was accepted in 2014-0530961R3 and 2013-0491651R3.
7. Although, under GAAP, a pro rata portion of DC’s retained earnings likely will be transferred onto the balance sheet of TC, this cannot occur as of the very beginning of TC’s taxation year, so that TC for its first year cannot “use” its retained earnings for thin cap purposes. Accordingly, TC might determine to have a year-end immediately after the butterfly.

Neal Armstrong. Summaries of Christian Desjardins and Nik Diksic, "Cross-Border Butterflies in the Context of Public Spin-Off Transactions", Draft 2015 CTF Annual Conference paper under s. 55(3.1)(b) and s. 55(1) – distribution.

A husband-wife team owned and managed a construction firm doing work in the general Vancouver area with the husband managing the business development and construction work and the wife handling the administrative and human resources work. In order to take advantage of her being a status Indian (he was not), the admin office was moved to the reserve which was closest to Vancouver. (Her own band was on a different reserve.)

The Crown did not challenge the Indian Act exemption for the regular salary paid to her (of approximately $100,000 per annum, which approximated her husband’s salary), nor did it challenge the deductibility of the bonusing of all of the firm’s remaining profits to her, including a $2 million bonus in 2008, but did challenge the exemption to her of those bonuses.

In finding that her bonuses were taxable to the taxpayer, Woods J found that there was no evidence that they were reasonably intended to compensate her for her duties of employment and, in particular, no evidence that her contribution was greater than her husband’s - and found, more generally, that there was no substantive connection between the reserve lands and the bonuses. However, she went on to note obiter that “if an Indian chooses to situate property on a reserve, the income should qualify for the exemption regardless of the individual’s motivation for doing so,” i.e., “the payment of the bonuses is abusive, but it is not abusive to locate the office on a reserve.”

It is not clear what she would have done if she had also been considering whether s. 67 denied the deduction of half or all of the bonuses, nor was she asked to address whether GAAR can apply to accessing the Indian Act exemption.

Neal Armstrong. Summary of Bell v. The Queen, 2016 TCC 175 under Indian Act, s. 87 and ITA. s. 67.