News of Note
Baker – Tax Court of Canada notes that CRA assessed under s. 160 so as to give credit for Quebec tax paid under the Quebec equivalent
Email this ContentOn the intestacy of her deceased brother, the taxpayer received property whose value was less than tax debts owing by him to CRA as well as to the ARQ. Smith J adverted to the fact that, technically, the taxpayer could have been assessed by each of CRA and the ARQ under s. 160 and its Quebec equivalent so that, depending on the numbers, she could have been assessed for taxes equalling double the value of the property devised to her. However, such double taxation did not arise here, as CRA only assessed for the difference between the value of her brother’s property received by her and the amount she paid to the ARQ.
Neal Armstrong. Summary of Baker v. The Queen, 2016 TCC 120 under s. 160(1).
Income Tax Severed Letters 13 July 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Deluca – Ontario Superior Court finds that CRA has no duty to protect taxpayers from participating in tax shelters
The taxpayer’s claim against CRA for negligence in failing to revoke the registration of a charity on a timely-enough basis (so that he suffered losses as a result of making supposedly valuable donations to the charity) was struck by Dunphy J in its entirety. Among other grounds, he stated:
The ITA cannot be construed to impose a duty on the Minister or his or her officials to administer the registration and supervision of registered charities in order to protect taxpayers from the risk of dealing with them…
Tax shelters are an instance where the private good competes directly with the public good. … [T]he risk of such deductions being disallowed ought most efficiently to rest with those seeking to benefit from the scheme rather than with taxpayers at large. …
Neal Armstrong. Summaries of Deluca v Canada, 2016 ONSC 3865 under s. 171(1), General Concepts – Negligence, Charter s. 15.
LLLPs may be partnerships on the basis of being governed by a contract for carrying on business in common
At 2016 IFA Roundtable, Q. 1, CRA orally indicated that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes, given their separate legal personality and that all the members (even the GP) have limited liability.
Joel Nitikman suggests that an LLLP or an LLP is a partnership for ITA purposes given that has the following hallmarks of partnership:
(a) it has at least two members;
(b) its members are carrying on business with a view to profit; and
(c) there is in force a contractual agreement, express or implied, in writing orally, or by conduct, between or among its members to carry on the business with a view to profit.
Adoption by CRA of this view presumably would entail repudiation of its position that Quebec limited partnerships which do not carry on business can be partnerships (see 2011-0411911C6, see also Folio S4-F16-C1, para. 1.18). (See also Matias Milet respecting the more flexible Wittgenstein approach of identifying "family resemblances" within a class of entities.)
Neal Armstrong. Summary of Joel Nitikman, "Is an LLP a Corporation for Canadian Tax Purposes? A Reply to the CRA," Tax Topics, (Wolters Kluwer), No. 2313, July 7, 2016, p.1 under s. 96.
CCPCs can choose to forego the small business deduction so as to maximize their GRIP
CRA accepts that a corporation may choose not to take the small business deduction so as to increase its general rate income pool account, thereby increasing the amount that may be distributed as eligible dividends.
Neal Armstrong. Summary of 20 June 2016 T.I. 2016-0648481E5 Tr under s. 89(1) - adjusted taxable income.
CRA states that limited partners carry on the trading business of their LP for purposes of the s. 39(4) capital gains election
A hedge fund, which is a limited partnership, engages in trading of Canadian securities which would cause it to be considered to be a trader or dealer in securities – but its trading gains are allocated to its Canadian limited partners. If they have made the s. 39(4) election, are those gains deemed to be capital gains? CRA responded:
[A] limited partner of an LP will be considered to be carrying on the business of the LP in applying subsections 39(4) and 39(5). … [P]aragraph 11 of… IT-479R … could be useful in determining…whether a limited partner of an LP in the described situation is a trader or dealer in securities for the purposes of subsection 39(5).
This might be saying that because the LP is carrying on a trading business, each limited partner thereby would be considered to be a trader or dealer in securities respecting the trading gains allocated to it, so that the election would not be available. Such a view would be debatable, given that s. 39(4.1) only deems the partners to own and dispose of the LP securities and does not deem them “to be carrying on the business of the LP” as asserted by CRA. Furthermore, although s. 96(1)(f) deems trading income of the LP to be trading income of the partners, it does not go on to deem the partners to be traders.
Neal Armstrong. Summary of 20 June 2016 T.I. 2014-0559961E5 Tr under s. 39(4.1).
Oil Search consideration for InterOil shares would include a substantial contingent cash payment based on how big InterOil’s natural gas resource turns out to be
Oil Search, a Papua New Guinea (“PNG”) corporation listed on the Australian Stock Exchange and whose ADSs trade over the counter in the U.S., is proposing to use a newly-incorporated Yukon subsidiary to acquire (under a Yukon Plan of Arrangement) InterOil, which is a Yukon corporation listed on the NYSE but essentially all of whose assets are natural gas assets held in a PNG subsidiary. The consideration incudes not only Oil Search shares or cash (subject to a U.S.$770M cap) but also “contingent value rights,” which will trade on the ASX and will entitle the holder to a cash payment based on the extent to which an interim resource assessment of a PNG natural gas project of InterOil shows a resource of greater than 6.2 trillion cubic feet equivalent ("tcfe"). For example, if the resource is measured at 10 tcfe, the CVRs would pay U.S.$1.17 billion in total.
The Canadian tax disclosure indicates that the proceeds of the InterOil shares likely would include the estimated fair market value of the CVRs at the time of the Arrangement, and suggests that although the CVRs are legally described as “notes,” they might not be subject to the prescribed debt obligation rules given that the amount payable is “uncertain and unlimited.” There likely is no discussion of the Budget rules applicable to Reg. 7000(1)(d) obligations, as this would not affect the broader statement that whether any gain would be on income or capital account is uncertain.
The U.S. tax disclosure waffles even on the issue whether the holders can get the benefit of their basis in the CVRs, and indicates that Code s. 483 imputed interest rules likely would apply.
The Australian tax disclosure is crisply Australian.
Neal Armstrong. Summary of InterOil Booklet for its acquisition by Oil Search under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
Polycom acquisition by Mitel is anticipated to avoid Mitel becoming a U.S. corporation
The acquisition of Polycom, a NASDAQ-listed U.S. corporation by Mitel in a Delaware merger (in which an indirect Delaware sub of Mitel (“Merger Sub”) is merged into Polycom, with Polycom as the survivor) is being structured so that it will be treated for accounting purposes as a purchase by Mitel and as not causing Mitel to be deemed to be a U.S. corporation under Code s. 7874 – even though the market cap of Polycom is almost 50% greater than that of Mitel. This is being accomplished by a portion of the cash consideration for the public’s shares of Polycom being paid in cash (with much of the cash coming from Polycom itself.)
Mitel and Polycom intend to treat the merger as divided for Code purposes into two transactions: (1) the redemption of a portion of the shares of Polycom stock held by each Polycom stockholder for the portion of the cash consideration that is funded by Polycom (including any borrowing by Merger Sub and Polycom and any cash distributions from subsidiaries of Polycom (collectively, the "redemption cash")), and (2) the exchange of a portion of the shares of Polycom stock held by each Polycom stockholder for Mitel common shares and the cash which is funded by Mitel (the "merger cash.") The shares of Polycom stock held by each Polycom stockholder will be divided between these transactions based on the relative fair market values of the merger consideration exchanged for such shares.
The payment of the redemption cash will be treated as a distribution in redemption of shares of Polycom stock. The receipt of the merger cash (but not the Mitel common shares) by U.S. Holders is expected to be subject to Code s. 304 so that the Polycom stockholders will be treated as if they received additional Mitel common shares in the merger equal in value to the merger cash, and then Mitel redeemed such shares for such merger cash.
Presumably for Canadian basis reasons, the merger agreement provides for the issuance, on the merger, of shares by Polycom to Mitel (or Merger Sub’s immediate Delaware parent) in consideration for Mitel's payment of the aggregate consideration to the Polycom shareholders.
Neal Armstrong. Summary of Polycom Proxy Statement under Mergers & Acquisitions – Cross-Border Acquisitions – Outbound – Delaware Mergers.
Slate Management – Ontario Superior Court finds that a generalized intent to achieve a s. 88(1)(d) bump was a sufficient basis to rectify in order to redo an amalgamation
A purchaser used a newly-formed AcquisitionCo to acquire a Target, and asked for and received a computation from its accounting firm of the amount by which it would be able to bump the assets of the Target under s. 88(1)(d) (although the advice on how to accomplish the bump was quite general), as well as receiving a rep from Target that Target would not do anything to jeopardize the bump. It later learned that it had busted the bump by amalgamating the three corporations in only one amalgamation, rather than using two sequential amalgamations.
Rather surprisingly, a rectification order was opposed by the Crown. Hainey J found that, on this evidence (and even without having received specific advice as to the precise way in which the amalgamations should occur to satisfy s. 88(1)(d)), the parties had a “a continuing specific intention to achieve the amalgamation in accordance with the tax bump rules,” so that a rectification order was granted to Amalco.
Hainey J also made a specific finding that the Fairmont appeal to the Supreme Court of Canada did not justify an adjournment of the application.
Neal Armstrong. Summary of Slate Management Corporation v Canada (Attorney General), 2016 ONSC 4216 under General Concepts – Rectification.
CRA recognizes glitch in the draft rules for Class 14.1 (formerly, eligible capital) properties
Effective January 1, 2017, eligible capital properties will become Class 14.1 depreciable property. There is a glitch in the draft legislation, which CRA has referred to Finance.
Where, prior to 2017, an addition to a taxpayer’s CEC was reduced under variable A.1 based on the gain realized by a non-arm’s length transferor of the eligible capital property, there is no upward adjustment under the draft legislation for this amount where there is an arm’s length sale after January 1, 2017 of what now is a Class 14.1 property – so that effectively there is double recognition of a capital gain.
Neal Armstrong. Summary of 2016-0641851E5 under s. 13(37).