News of Note

Where a non-resident actor provides acting services in Canada through a related corporation, for instance, a U.S.-resident actor providing such services through an LLC or S corp, the 23% withholding tax under s. 212(5.1) on the gross consideration paid can be avoided if the corporation files a Part I return for the year by its filing due date therefor and elects therein to have s. 216.1 apply. CRA considers that if the non-resident corporation misses this deadline, there is no ability to access s. 216.1, and (based on s. 115(2.1)) the non-resident corporation cannot late-file a “regular” Part I return where the provision of the acting services had resulted in it having a Canadian permanent establishment under the Treaty.

Neal Armstrong. Summaries of 27 July 2016 T.I. 2015-0603271E5 under s. 216.1(1) and Treaties - Art. 16.

Lightstream Resources carries on its business through two partnerships. As at the end of 2015, it had $1.53B in Canadian tax pools available to it. It had approximately Cdn.$1.53B of long-term debt as at June 30, 2016 comprising Secured Notes of U.S.$650M, Unsecured Notes for U.S.$254M and amounts owing under a Revolving Credit Facility. It defaulted on an interest payment owed to the Secured Noteholders in June 2016, and is proposing a "Recapitalization" transaction (mostly occurring under a CBCA Plan of Arrangement) which, in approximate terms, would entail

• a s. 86 exchange by its common shareholders of their shares for new common shares representing approximately 2.25% of the post-Recapitalization issued and outstanding common shares plus three-year out-of-the-money Warrants to acquire three times that number of common shares,
• the exchange by the Unsecured Noteholders of their Notes for common shares representing 2.75% of that total plus three-year Warrants (not as much out-of-the-money) to acquire the equivalent of 5% of the common shares and
• the exchange by the Secured Noteholders for common shares representing 95% of that total (with Apollo and GSO Capital Partners holding about 75%).

These exchanges (net of some additional secured borrowings) would eliminate Cdn.$1.175B of debt and eliminate Cdn.$108 million of annual interest expense.

The transactions are structured so that the forgiveness respecting the Unsecured Notes will occur immediately before an amalgamation of Lightstream with a wholly-owned numbered company, whereas the exchange of the Secured Notes will occur after the amalgamation. The exchange of the old common shares is to be structured as a s. 86 exchange (with the value of the warrants received not expected to give rise to a deemed dividend), the exchange of the Unsecured Notes will occur on a non-rollover basis and the exchange of the Secured Notes is targeted to occur on a s. 51 rollover basis (assuming the Secured Notes can qualify as capital property), so that a conversion right is first to be added to the Secured Notes before the conversion occurs.

There is a backstop plan to accomplish something similar under the CCAA if this Recapitalization plan is not approved.

Neal Armstrong. Summary of Lightstream Circular under Other – Recapitalizations or note exchanges.

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.

The BEPS final action plan contemplates that the permanent establishment definition will be changed so as to no longer require the dependent agent to conclude contracts in the principal's name: it will be sufficient that the dependent agent habitually plays the principal role leading to the routine conclusion of contracts without material modification by the enterprise — that is, the principal. Given that dependent agents will likely play that role, the existence of a PE will often largely depend on whether the “habitually” requirement is met. Some observations on the “habitually” requirement:

• “a mere transient presence in a country is less likely to give rise to a PE than is a presence amounting to almost six months.”
• “An activity that is exercised recurrently is generally considered habitual, even if its duration does not exceed six months…[e.g.] a dependent agent who spends every Thursday in another country negotiating contracts that are binding on his employer”.
• The German Federal Tax Court found that regularly recurring trips to Germany (of roughly 12 per year) by the dependent agent (a Portuguese director) aggregating less than 60 days in total for each of four successive years fell below the “habitually” threshold.
• Whether the business is temporary in nature (e.g., a seasonal business) lowers the threshold - as does the situation where the dependent agent is the exclusive outlet for the non-resident’s product (e.g., where a wine producer sells all of its output at a particular festival through the local agent).

Neal Armstrong. Summary of Christian Ehlermann and Marla Castelon, "When Does a Dependent Agent Act Habitually?," Tax Notes International, 26 September 26 2016, p. 1141 under Treaties – Art. 5.