News of Note
CRA generally expects Canadian taxpayers to obtain U.S. transcripts to back up U.S. FTC claims
Email this ContentAt the June 2016 STEP Roundtable, CRA noted that, starting in 2015, it began to no longer exempt Canadian taxpayers' claims for U.S. foreign tax credits from the approach, which it already had been applying to FTC claims for other jurisdictions, of requiring a copy of the foreign tax return as well as proof of payment of the foreign tax. In its official response published last week, CRA suggested that taxpayers get U.S. transcripts (evidencing payment) even before any CRA review and stated:
According to the IRS website “Most [transcript] requests will be processed within 10 business days”. ...
[T]he IRS has a very structured process for requesting tax account transcripts online or through the mail using Form 4506-T. … In addition, the majority of the U.S. states have an online system which allows the taxpayer to print his/her “account statement” which would confirm the taxpayer’s final tax liability.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.9, 2016-0634941C6 under s. 126(7) – non-business income tax.
Sirius XM exchangeable share structure uses a Canadian-controlled Canadian purchaser
A Delaware subsidiary (the “Guarantor”) of a Delaware public corporation (Sirius XM Holdings Inc., or “SIRI”) holds approximately a 37% equity interest in TSX-listed Sirius XM Canada Holdings Inc. (the “Company”) (some of it in the form of non-voting shares to address CRTC non-resident control issues) and two Canadian corporations (Slaight and Obelysk), together have approximately a 22.4% equity interest in the Company. It is proposed that the Company shareholders (who also include the CBC, with a 10% equity interest, and the public) will transfer their shares under an OBCA Plan of Arrangement to a new Canadian company (the “Purchaser”). Slaight and Obelysk will together hold 67% of the voting interests and 30% of the equity of the Purchaser at the time of implementing the Plan, with the Guarantor holding the balance of the voting interests and equity. Public shareholders will be offered cash or shares of SIRI for their Company shares, subject to proration based on a maximum share consideration. Shareholders who wish rollover treatment are being offered exchangeable shares of the Purchaser, subject again to potential proration. The Purchaser’s obligations are guaranteed by the Guarantor. Slaight, Oblelysk and the Guarantor will receive only shares of the Purchaser as their sale consideration (much of it in the form of non-voting prefs in the case of the Guarantor.)
Thus, the issuer of the exchangeable shares is not a SIRI subsidiary. Another unusual feature is that the holders of the exchangeable shares will have no right to vote at SIRI (or Purchaser) meetings.
The exchangeable shares are to be redeemed (subject to the usual overriding call right of a “Callco”) on their 5th anniversary (or sooner, if most of them are exchanged before then.)
Neal Armstrong. Summary of Sirius XM Canada Holdings Inc. Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Exchangeable Share Acquisitions.
Shahbazi – Tax Court of Canada denies charitable credits for donated goods because the receipts did not describe the goods
In denying charitable credits for large donations of household goods, where the tax receipts did not contain any description of the donated property, Woods J stated (at para. 19):
Even if some flexibility in interpreting the necessary requirements is appropriate, it is not possible in my view to completely overlook the requirement that a tax receipt for a donation of non-cash property must contain a brief description of the property donated.
Neal Armstrong. Summary of Shahbazi v. The Queen, 2016 TCC 129 under s. 118.1(2).
Public spin-off butterfly rulings contemplate no substantive changes to the new common shares issued on DC’s s. 86 reorg, treat replacement stock options as boot and treat effective splitting of DC management contract as no disposition
Some features of the most recent published ruling for the butterfly spin-off by a Canadian public corporation (DC) to Spinco:
- The assets (some held directly) of the two divisions to be spun-off are to be first rolled by DC into a Newco subsidiary before the transfer by DC of the Newco shares to Spinco – with Newco then being wound-up into DC at the completion of the butterfly reorg under s. 88(1). The stated reason of “simplification” may relate to Newco closing an arm’s length borrowing immediately before the spin-off and immediately paying off a note it issued to DC on the drop-down.
- In order that a disproportionate amount of the cumulative eligible capital of DC is not transferred to Newco on the drop-down, DC and Newco are permitted to pretend, in completing the s. 85(1) election form, that the CEC is a proportionate portion of the actual CEC amount (with “proportionate” defined in a somewhat circular manner).
- DC is managed by Manageco, whose long-term management contract is first to be redrafted to handle the split-up, e.g., splitting the compensation between management of the retained division, and the divisions to be spun-off, with this split to be effected based on the relative (post-drop-down) fair market value of the Newco shares. CRA ruled that these amendments would not cause a disposition of the contract. At the same time as the drop-down of the affected divisions to Newco, Manageco will then effect a s. 85(1) dropdown of its management business to two new subsidiaries.
- In order to comply with s. 7(1.4), there will be an exchange of pro rata portions (based on the relative FMV of the Newco shares) of each DC employee stock option to Spinco and DC in consideration for the issuance of replacement options. Such issuance by Spinco will be treated as non-share consideration for the butterfly transfer of Newco shares to Spinco (otherwise occurring in consideration only, or mostly, for the issuance of Spinco special shares).
- Before the butterfly spin-off, there is a s. 86 exchange of old comon shares for new common shares and for special shares of DC, with the stated capital of each old common share to be allocated to that of the two new replacement shares based on their relative FMV. The new common shares are identical to the old ones, except for their share provisions referring to the prior rights of the special shares (mainly, to receipt of any redemption amount). Thus, in order to get the s. 86 ruling, it was unnecessary to make any substantive changes to their listed rights.
Neal Armstrong. Summaries of 2015 Ruling 2014-0558831R3 under s. 55(1) – distribution, s. 7(1.4), s. 86(1), s. 85(1)(d) and s. 248(1) - disposition.
Municipality of Woerden – European Court of Justice finds that a sale of a building at 10% of cost to an intermediary for 90% non-taxable use entitled the vendor to full input tax credits
If a Dutch municipality had provided two buildings constructed by it to the mostly VAT-exempt building users (e.g., schools) directly, it would have been entitled to a credit for only 10% of its construction-related VAT costs (being the percentage of use by a taxable sports facility). Instead, after a newly-formed non-profit foundation was interposed between it and the users, it sold the buildings to the foundation at 10% of its cost and reported VAT on that below-FMV selling price.
This worked, so that the municipality received 100% credit for its VAT costs. President Biltgen stated:
[I]f the supply price is lower than the cost price, the [input tax] deduction cannot be limited in proportion to the difference between the supply price and the cost price, even if the supply price is considerably lower than the cost price, unless it is purely symbolic. … The fact that that purchaser allows parts of the building…to be used without charge is of no importance… .
B.C. Sky Train is similar.
Neal Armstrong. Summary of Municipality of Woerden v. Secretary of State for Finance, Netherlands, C:2016:466 (ECJ (10th)) under ETA s. 141.01(1.1).
Mariano – Tax Court of Canada makes the promoter of a leveraged donation scheme jointly and severally liable with the unsuccessful test-case taxpayers (whose appeals it had controlled) for the Crown’s costs
After finding that the leveraged donation transactions in Mariano were a sham, Pizzitelli J dealt with the disposition of the Crown’s Bill of Costs for $491,137. Although there had been 27,000 participants in the scheme, there were only seven appellants before him, who argued that they should not be responsible for costs that were incurred on a scale reflecting larger amounts at stake than the credits taken by them personally.
Although he dismissed all their arguments respecting scaling back the bill, Pizzitelli J ultimately was sympathetic. Even though this went beyond the literal wording of the Tax Court Rules, he found that the promoter of the scheme (who had controlled the litigation from its start) should also be liable for the costs, on a joint and several basis with the appellants as a group (with the appellants bearing any costs which the Crown might seek to collect from them amongst themselves on a pro rata basis in accordance with the size of the credits claimed by them respectively). It would not be surprising if the Crown now presents 100% of the bill to the promoter.
Summary of Mariano v. The Queen, 2016 TCC 161 under Tax Court Rules, Rule 147(1).
Trustpower - Supreme Court of New Zealand finds that expenditures contributing to an expansion project but made before a decision to proceed were on capital account
The highest New Zealand court found that approximately NZ$18M of expenditures incurred by a New Zealand power company in getting “resource consents” (re land and water use and discharge permits) for four potential power generation projects were capital expenditures, notwithstanding that, at trial, no decision had yet been made to proceed with the projects (nor had they been abandoned).
Young J stated:
The expenditure on obtaining resource consents… was directly related to specific projects that would be on capital account if they came to fruition. The projects could not proceed without resource consents. Obtaining the consents thus represented tangible progress towards their completion. …
Expenditure which is not directed towards a specific project or which is so preliminary as not to be directed towards the advancement of such a project is likely to be seen as being on revenue account.
Bowater was accepted as authority for the latter proposition, but not for the broader (incorrect in his view) proposition that “expenditure on a capital project which does not result in the acquisition of a capital asset is deductible.”
Neal Armstrong. Summary of Trustpower Limited v. Commissioner of Inland Revenue, [2016] NZSC 91 under s. 18(1)(b) – capital expenditure v. expense – improvements v. running expense.
Income Tax Severed Letters 3 August 2016
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Friday’s draft legislation fixes gaps in the ECP transitional rules
Lorne Richter pointed out two problems with the 2016 Budget rules for the transition from eligible capital property to Class 14.1 depreciable property. The transitional rule in draft s. 13(37)(d) generally permits a corporation that has disposed of ECP in calendar 2016 but during a taxation that ends in 2017 to elect to have a s. 14(1)(b) inclusion rather than realizing a taxable capital gain.
The first problem now fixed in the draft legislation which was released on Friday is that there will now be a CDA addition (in the case of a CCPC) for an income inclusion under s. 13(37)(d).
The second problem was that the election was not available if the taxpayer no longer is carrying on the business on January 1, 2017 (so that the election would not be available for goodwill proceeds received on a 2016 sale in the straddling year). This also has been addressed in the draft legislation by dropping a requirement that the business be carried on on January 1, 2017 (although there still is a requirement that the "taxpayer has incurred an eligible capital expenditure in respect of [the] business before January 2017," which could be problematic for goodwill which has not been purchased).
Lorne Richter, "ECP Transitional Rules and 2016 Asset Sales," Canadian Tax Highlights, Vol. 24, No. 7, July 2016, p. 12 under s. 13(37)(d).
Exercise of employee stock options before a s. 86 spin-off transaction may entail reliance on a comfort letter
Where, prior to implementation of a spin-out, employees exercise their options to acquire common shares of the pre-spin corporation, which are then exchanged under a s. 86 reorg for new common shares and special shares (to be exchanged under the Plan of Arrangement for Spinco shares), under current law the common shares acquired on exercise would not qualify as prescribed shares (due to their imminent cancellation) – although a November 29, 2012 comfort letter issued to Ian Gamble re the Telus transaction recommends fixing this problem. A potential advantage to effecting the spin-out as a s. 84(2) PUC distribution is that an exception accommodating such distributions is already built into Reg. 6204(1)(b).
Neal Armstrong. Summary of John McClure and Brian Kearl, "Stock Options in Spinout Transactions," Canadian Tax Highlights, Vol. 24, No. 7, July 2016, p. 7 under Reg. 6204(1)(b).