News of Note

Lowe’s acquisition of RONA through a Nova Scotia ULC is not conditional on approval of prefs

It is proposed that RONA will be acquired for cash consideration under a Quebec Plan of Arrangement. The proposed purchaser is the existing Nova Scotia ULC operating subsidiary of Lowe’s, a North Carolina public corporation.

RONA has 7 million of outstanding TSX-listed preferred shares in addition to 107 million TSX-listed common shares. The transaction is not conditional on approval of the preferred shareholders, so that if the preferred shareholders do not approve the Arrangement, the transaction to purchase the common shares for $24 per share will proceed without them (so that the preferred shares do not have any extortive advantage).

Neal Armstrong. Summary of Circular of RONA Inc. under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound - Canadian Buyco.

Inwest – B.C. Supreme Court finds that a reasonable filing position cannot be a “misrepresentation” for statute-barring purposes, and suggests that there is no fixed place of “business” if there is no source of business income

A decision (released back in August) dealt with a plan which avoided the high rate of B.C. corporate income tax through rolling shares into a Yukon corporation (“Wesbild”), which purported not to have a B.C. permanent establishment, before a sale of the shares closed (giving rise to a $336M capital gain). Wesbild’s position was that, applying Marconi, it was not carrying on business, so that under Reg. 400(2) it did not have a fixed place of “business” in B.C. CRA reassessed (but not until after the normal reassessment period) on the basis that, in the context of Reg. 400 et seq., “business” included having property or taxable capital gains as the only sources of income.

Fitzpatrick J., after noting that the French version of s. 152(4)(a)(i) rendered “misrepresentation” as “misrepresentation of facts,” found that “a statement of a filing position that, even if that position may be incorrect, involves a determination of law or mixed fact and law will not be a misrepresentation if that filing position is reasonable" and that it is sufficient "if that reasonable filing position is evident from the tax return.” Thus, it was not even necessary to get to the “neglect or carelessness” branch of s. 152(4)(a)(i) to determine that the reassessment was statute-barred. In any event, CRA did not establish neglect or carelessness given that the no-PE position had been carefully considered by Wesbild’s in-house tax lawyer – and furthermore (although this was not necessary to establish lack of carelessness), he had consulted outside counsel (Robert Kopstein at Blakes).

Respecting the latter point, Fitzpatrick J. found that it was sufficient for Wesbild to indicate that it had gotten detailed written advice from Kopstein and that it was unnecessary to put his opinion in evidence, given that it should not be compelled to waive its privilege.

Respecting CRA’s broad interpretation of “permanent establishment,” he also stated obiter:

There is no indication that the CRA’s currently-advanced dictionary definition of “business” had any support at all in 2001/2002 or even at this time.

Neal Armstrong. Summaries of Inwest Investments Ltd. v. The Queen, 2015 BCSC 1375 under s. 152(4)(a)(i), s. 232(1) – solicitor-client privilege, Reg. 400(2), Statutory Interpretation – French and English Version.

McCarthy – Tax Court of Canada finds that being examined by a Justice lawyer is not torture

Boyle J dispatched an argument that being examined for discovery by a Justice lawyer constituted torture, so that the resulting evidence would be rendered inadmissible. This was a self-represented taxpayer, right?

Neal Armstrong. Summary of McCarthy v. The Queen, 2016 TCC 45 under General Concepts – Evidence.

Beggs – Tax Court of Canada states that the Federal Court is the appropriate forum where CRA refuses to grant a Reg. 105 waiver

Favreau J found that a refusal of CRA to issue a Reg. 105 waiver was not an “assessment” that could be objected to, or appealed to the Tax Court, and stated that “the Appellants will always have the opportunity to turn themselves to the Federal Court of Canada in order to force the Minister to change its decision as stated by Justice Bowie in Kravetsky.”

Neal Armstrong. Summary of Beggs v. The Queen, 2016 TCC 11 under s. 169(1).

CRA considers that a lump sum received on signing a 15-year supplier loyalty agreement is includible under s. 56.4 with no deferral available

CRA considered that a lump sum payment received from a major supplier for signing a 15-year “supplier loyalty agreement” would be includible in income when received under s. 56.4(2) on the grounds that the loyalty covenant was intended to restrict the way in which the taxpayer made its purchases (i.e., it was in respect of a “restrictive covenant”) – or, failing that, it would be included in the taxpayer’s income as an inducement under s. 12(1)(x). Either way, CRA considered that spreading the income inclusion over the 15-year term consistently with the accounting treatment “would be inconsistent with the provisions of the Act” (and added an inexplicable reference to this being prohibited by s. 18(1)(e), presumably for some reason other than basic confusion as to the difference between the issues of income and expense recognition).

CRA did not discuss Doteasy, which confirmed that Ellis Vision had found that "the paragraph 20(1)(m) reserve was available even though the amount might be included in income under [another section] so long as it was described in paragraph 12(1)(a)." Thus, provided the agreement to be loyal for the average length of a marriage is considered to be on account of future services, the s. 20(1)(m) reserve should be available even if the consideration is considered to be included in income under s. 56.4(2).

Neal Armstrong. Summaries of 2015-0618601E5 under s. 56.4(2), s. 12(1)(x) and s. 20(1)(m).

Income Tax Severed Letters 2 March 2016

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

French – Federal Court of Appeal finds that it is arguable that Parliament would have intended what constitutes a gift outside Quebec to be informed by the Civil Code

The position that a Canadian individual residing outside Quebec could generate a credit for at least the cash portion of his “donations” made as part of a leveraged donation tax shelter was buttressed in his pleadings by advancing the proposition that Parliament did not intend for split gifts to receive significantly different treatment in the rest of Canada as contrasted to Quebec (where split gifts were accepted in the Civil Code) even before the introduction of the split gift rules in the Act effective after 2002.

In accepting a submission that these pleadings should not be struck, Noël JA stated that “it cannot be said with certainty that the meaning of ‘gift’ prior to the [December 31] 2002 amendments excluded the notion of split gift in the common law provinces,” and that “it would have been open to Parliament to attribute to the word gift a meaning which coincides with the civil law and...it is arguable that this is what Parliament intended.” In other instances where there are apparent differences in the common law and civil law concepts, it may also be appropriate to consider that Parliament would likely not have intended differing tax results based on which provincial law applies.

Neal Armstrong. Summary of French v. The Queen, 2016 FCA 64 under s. 118.1(1) - Total Charitable Gifts and Interpretation Act, s. 8.1.

The minority shareholders’ Canadian Oil Sands’ shares are being exchanged for Suncor shares under a 4-party "triangular" amalgamation

Suncor, a CBCA corporation, recently acquired 73% of the common shares of Canadian Oil Sands on the basis of 0.28 of a Suncor common share for each COS common share. Second stage transactions now are proposed for the COS shares of the remaining shareholders to be exchanged for Suncor shares using the same exchange ratio. There will be no Plan of Arrangement – just a triangular amalgamation.

Suncor has formed a subsidiary (“Holdco”) which holds “Newco,” both with nominal assets. Under an amalgamation of Newco with COS under the ABCA, the minority COS shareholders will receive Suncor shares for their COS shares, and the 1 common share of Newco will be converted into the same number of common shares of Amalco as were formerly held by those exchanging shareholders. Holdco will likely then amalgamate under the ABCA with Newco.

Because after the first amalgamation Amalco will not be wholly owned by Suncor, there can be no bump to the ACB of the Amalco shares of Suncor under s. 87(9)(c). It is not obvious to me why Holdco was inserted into the planned transactions.

Neal Armstrong. Summary of Canadian Oil Sands under Mergers & Acquisitions – Subsequent Acquisition Transactions – Amalgamations - Shares.

Veracity - B.C. Supreme Court finds that a “Quebec year-end shuffle” used to largely avoid provincial income tax on a capital gain was contrary to the B.C. GAAR

In order to avoid most of the B.C. capital gains tax otherwise applicable to a share sale which closed in July 2002, the B.C. shareholders rolled their shares into a Newco (“Veracity”), which had a taxation year ending on August 31, 2002 for Quebec taxation purposes, and a taxation year ending on June 30, 2003 for federal and B.C. purposes. In order that 100% of the taxable capital gain would be allocated to B.C. for Quebec purposes, small directors’ fees were paid to B.C. directors in July 2002 (i.e., before the August 31, 2002 Quebec year end). In order that 90% of the taxable capital gain would be allocated to Quebec for B.C. purposes, Veracity purchased units of a listed limited partnership with a September 30 year end, so that as at September 30, 2002 (i.e., after the Quebec year end) a pro rata portion of the gross revenues and salary expense of the LP would be allocated to Veracity qua unitholder.

In affirming CRA’s assessment to apply the B.C. GAAR to allocate 100% of the taxable capital gain to B.C., Macintosh J found that although the LP units purchased were “a reasonable, stand-alone investment,” the targeted tax savings were five-times the investment return on the LP units, and the units were purchased primarily for the purposes of these “Quebec Year-end shuffle” transactions. The transactions also were “abusive of the inter-provincial income allocation provisions,” whose allocation formula is “designed to prevent both the over-taxation and the under-taxation of income earned by a corporation which is active in more than one province.”

Quite interestingly, he also found that the choice of differing year ends represented additional avoidance “transactions,” and that the transfer of the shares under s. 85(1) into Veracity was an abuse of s. 85(1) as this “allowed for the absolute avoidance of B.C. tax, not simply a deferral under s. 85.”

Neal Armstrong. Summaries of Veracity Capital Corporation v. M.N.R., 2015 BCSC 2278 under s. 245(3), s. 245(4).

AgraCity – Federal Court of Appeal notes that the boundary between ss. 247(2)(a) and (b) is unresolved

A Barbados corporation reported substantial profits from the sale of a herbicide to Canadian farmers, and deducted amounts paid to a non-arm’s length Canadian corporation (AgraCity – which was the taxpayer in the case) as service fees. The Crown’s pleadings in support of its assessment of AgraCity stated that the Barbados corporation did not sell any herbicide, and that the fair market value of the fees received by AgraCity should be increased by all of the profit reported by the Barbados corporation. However, in pleadings in support of an assessment of the Canadian parent of the Barbados corporation, the Crown pled that the Barbados corporation sold the herbicides to AgraCity, thereby giving rise to FAPI under s. 95(2)(a.1) to the Canadian parent.

In finding that these inconsistent pleadings were acceptable, Webb JA noted that it is inherent in separate persons (including related persons) being separate taxpayers that inconsistent assessments and, thus, inconsistent pleadings may result - and that the Crown acknowledged that it did not seek to have both assessments upheld.

Webb JA also found that at the pleadings stage it was acceptable for the Crown to rely both on ss. 247(2)(a) and (c) (re terms of the transactions departing from arm’s length terms) and on ss. 247(2)(b) and (d) (re the transactions themselves being something that arm’s length persons would not have entered into), quoting with approval a statement in Cameco (2015 FCA 143):

No court has determined where paragraphs 247(2)(a) and (c) end and where 247(2)(b) and (d) begin and I agree with the Crown that it would be inappropriate to attempt to resolve this issue on a motion to strike… .

Neal Armstrong. Summaries of AgraCity Ltd. v. The Queen, 2015 FCA 288 under s. 247(2) and Tax Court Rules, s. 82.

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