News of Note
CRA finds that 25% Part XIII tax applies to interest paid by a transparent ULC (held through a QSSS by an S-Corp) to the S-Corp
Email this ContentWhere an S-Corp makes an interest-bearing loan to a Nova Scotia ULC held by it through a qualified Subchapter S subsidiary, the interest paid on the loan will not be eligible for Treaty benefits under the anti-hybrid rule in Art. IV, 7(b): the interest will be disregarded for U.S. purposes, given the fiscally transparent nature of the ULC and QSSS; whereas the interest would be regarded for such purposes if the ULC were not transparent, i.e., the hybrid status of the ULC and QSSS affects the Code treatment of the interest.
This written response is clearer than an oral response given at the 26 May IFA Roundtable, which referred to the S-Corp parent as being “fiscally transparent” and to the “interest…effectively being paid by the U.S Parent (or its members) to itself.” Thus, in contrast to the oral response, which potentially was confusing on this count, the written response is consistent with the longstanding CRA view that S Corps can qualify for Treaty benefits (assuming that, unlike this example, Art. IV, 7(b) does not apply.)
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 9, 2016-0642131C6 under Treaties – Art. 4.
Centerra Gold to acquire Thompson Creek solely for Centerra shares
Centerra Gold is proposing to acquire all of the shares of Thompson Creek under a B.C. Plan of Arrangement in consideration solely for Centerra shares, with the acquired shares contributed immediately to a new holding subsidiary of Centerra. As there is no nominal cash or other non-share consideration, the Thompson Creek shareholders are not required to file an election form in order to receive rollover treatment - so that Centerra will have lower basis in the acquired shares. The U.S. tax disclosure indicates that the exchange is expected to be a “B” reorg (which requires that the sole consideration be shares).
The exchange ratio (resulting in the Thompson Creek shareholders holding only 8% of Centerra) reflects that Thompson Creek has U.S.$673 million of deferred revenue obligations under a gold stream arrangement for its B.C. mine, as well as U.S.$823 million of long-term debt. Centerra has renegotiated the gold stream arrangement to reduce the gold delivery obligation and create a copper delivery obligation.
Neal Armstrong. Summary of Thompson Creek Circular under Mergers & Acquisitions – Mergers – Share-for-Share.
CRA confirms that the s. 95(2)(c) rollover can apply on a dropdown of shares made to an LLC as a contribution of capital rather than for “share” consideration
FA1 transfers all of its shares of FA2 to another non-resident subsidiary of FA1, which is a non-share corporation (“FA3”), as a capital contribution, i.e. no new member interests are issued by FA3. S. 93.2(3)(a) deems FA3 to have issued shares to FA1 in respect of the transfer if the fair market value of a class of its shares (i.e., the FMV of its membership interest) is increased as a result of the transfer.
CRA noted that, as a technical matter, s. 93.2(3)(a) does not appear to go quite far enough so as to permit the particulars of the rollover formula in s. 95(2)(c) to be filled in. However, CRA went on to find that despite these “textual challenges,” the s. 95(2)(c) rollover would be available provided that the fair market value of the membership interest in FA3 increased by the FMV of the contributed shares.
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 10, 2016-0642101C6 under s. 93.2(3).
CRA states that it sees no substantive differences between LLCs, and LLPs and LLLPs
In its oral comments at the 26 May 2016 IFA Roundtable, CRA indicated it had finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes, but indicated that it was prepared as an administrative matter to continue accepting that an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) is a partnership if it is clear that the members are carrying on business in common with a view to profit, all members and the LLP or LLLP having been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018.
In its written response published yesterday, CRA referred to the entities’ “separate legal personality” and “the extensive limitation of liability afforded to all of their members,” and also stated:
[I]t has become widely accepted that U.S….LLCs…are properly viewed as corporations for the purposes of the Act, notwithstanding…Anson… . We see little substantive difference between LLPs, LLLPs and LLCs governed by the laws of the states of Florida and Delaware.
24 other states provide for LLLPs or LLPs. CRA stated:
We suspect that much of this reasoning may be applicable in respect of entities of other states of the U.S. and perhaps other foreign jurisdictions… .
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 1, 2016-0642051C6 under s. 96.
CRA is thinking about providing administrative relief on computing late-filed PLOI election penalties on a debit-by-debit basis
Where a corporation resident in Canada wishes to make PLOI elections respecting intercompany balances resulting from hundreds of intercompany sales, CRA considers that “each intercompany transaction resulting in a receivable… should be treated as a unique amount of indebtedness,” so that the $100 per month late filing penalty must be calculated separately with respect to each such receivable. However, “the possibility of providing administrative relief in this regard is currently under review,” e.g., “aggregat[ing] certain amounts receivable… on an annual, quarterly, or monthly basis.”
Neal Armstrong. Summaries of 26 May 2016 IFA Roundtable, Q. 11, 2016-0642031C6 under 15(2.13) and s. 212(13).
Pacific Rubiales restructuring will leave 0.006%, and at least 29.3%, of the company to the existing shareholders and plan sponsor, respectively
The debt of Pacific Exploration (formerly, Pacific Rubiales), which filed for protection under the CCAA in April, 2016, consists of U.S.$4.1B of notes, U.S.$1.3B of loans and U.S.$0.50B of DIP financing, of which U.S.$0.24B was advanced by Catalyst. Under the proposed CCAA Plan, the notes and loans will be exchanged for approximately 58.2% of the Corporation’s fully diluted shares, the Catalyst DIP financing will be exchanged for 29.3% of the fully diluted shares – and the DIP providers will hold warrants (with a nominal exercise price) to acquire 12.5% of the fully diluted shares. In addition, those who acted to support the recapitalization before a specified time will receive, in aggregate, an extra 2.5% of the fully diluted common shares (the “Early Consent” shares- which effectively come out of the shares otherwise receivable by those slower to act). The holders of the notes and loans also will have the option to cash in some of their common shares, to be funded out of additional cash subscriptions by Catalyst and some others. Existing common shareholders will hold 0.006% of the post-Plan shares.
The U.S. tax disclosure indicates a risk of the Early Consent shares being treated as a taxable consent fee, whereas the Canadian disclosure is clear that they are part of the exchange consideration.
The U.S. tax disclosure discusses the risk that U.S. holders would receive rollover treatment – on the basis that their debt holdings are “securities,” or that the Plan would be considered to be a recapitalization. There are no Canadian risk disclosures.
Neal Armstrong. Summary of Pacific Exploration Circular under Other – Recapitalizations or note exchanges.
Melman – Tax Court of Canada faults failure to review a tax return with a low amount payable
An executive received a $15M dividend, deposited $4.7M to mature on the filing due date, did not read his return (omitting the dividend) and promptly redeployed the $4.7M. S. 163(2) applied.
Neal Armstrong. Summary of Melman v. The Queen, 2016 TCC 167 under s. 163(2).
Rio Tinto Alcan decision now available in English
The English version of Rio Tinto Alcan (summarized in Monday's post) is now available. It reads like it was drafted by Hogan J rather than a translator.
Slightly revised summaries of Rio Tinto Alcan Inc. v. The Queen, 2016 TCC 172 under s. 18(1)(a) – legal fees, s. 20(1)(g), s. 20(1)(bb), s. 20(1)(cc), 169(2.1), 20(1)(e), and s. 14(5) – eligible capital expenditure.
Income Tax Severed Letters 20 July 2016
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Rio Tinto Alcan – Tax Court of Canada finds that investment dealer fees incurred respecting the advisability of making hostile takeover were fully deductible under s. 9 and 20(1)(bb) – and $17M in legal fees were deductible under s. 20(1)(cc)
Hogan J articulated a distinction between (currently deductible) “expenses linked to [board] oversight [,which] are current expenses since they relate to the management of the process of producing income of the corporation,” and (capital-account) “expenses incurred in the course of implementing a transaction leading to the acquisition of capital property.” Accordingly, he found that the substantial portion of investment dealer fees incurred by the Alcan board that represented input to its decision to launch a hostile bid for a French public company (i.e., 65% of the Morgan Stanley fee and 35% of the Lazard Frères fee) was currently deductible, whereas the balance of the fees relating to assistance in the bid was a capital expenditure and addition to the ACB of the acquired shares. The same fees also were fully deductible in the alternative under s. 20(1)(bb) as being fees relating to advice on the advisability of acquiring the shares of the target (Pechiney).
The same principles applied to investment dealer fees incurred respecting a subsequent butterfly spin-off transaction, so that the portion of Lazard Frères fees that related to advice on various divestiture options up to the time of the final board decision to effect a butterfly spin-off was fully deductible. The alternative deductibility of these same fees under s. 20(1)(bb) was based on the proposition that the butterfly mechanics entailed the sale (on a rollover basis) of the shares of the Opco in question to the new public company (Novelis) in consideration for the acquisition of (subsequently redeemed) preferred shares of Novelis – so that the fees related to advice culminating in the sale or purchase of shares, as required by s. 20(1)(bb). The balance of the Novelis fees (including professional fees) were deductible as disposition expenses under s. 40(1)(a).
$19M in fees paid to a French lobbyist firm related only to smoothing the Pechiney bid and were capital expenditures (i.e., ACB additions).
Legal fees of around $17M incurred in getting various regulatory (e.g., competition, securities) approvals for the Pechiney takeover were fully deductible under s. 20(1)(cc).
As noted, the portions of the fees on capital account which were not deductible under s. 20(1)(cc) were additions to the cost of the Pechiney shares (or s. 40(1)(a) disposition expenses incured in the butterfly) rather than being eligible capital expenditures. S. 20(1)(e) was not sufficiently advanced in the Alcan Notice of Objection and, in any event, Alcan did not provide any evidence as to how the fees incurred on capital account should be allocated between the cash and share consideration for its Pechiney bid.
Neal Armstrong. Summaries of Rio Tinto Alcan Inc. v. The Queen, 2016 CCI 172 under s. 18(1)(a) – legal fees, s. 20(1)(g), s. 20(1)(bb), s. 20(1)(cc) and s. 14(5) – eligible capital expenditure.