News of Note
Sierra Metals is relying on a preliminary internal sale to qualify its capital distribution of a subsidiary under s. 84(4.1)
Email this ContentSierra Metals is proposing to effect a stated capital distribution of a Newco subsidiary (i.e., Cautivo Mining, which indirectly holds a Peruvian exploration company) to its shareholders in reliance primarily on the exception in ss. 84(4.1)(a) and (b) from deemed dividend treatment, although a nod is also given to the s. 84(2) exception. The disclosure relies on the proposition that the Newco shares will be issued to Sierra immediately before the distribution in exchange for transferring Sierra’s existing subsidiary to Newco, so that what will be distributed will represent proceeds of disposition.
Newco will be making a rights offering immediately after the distribution (which, as compared to the alternative of Newco being capitalized by Sierra with cash beforehand, has the effect of reducing the size of the distribution).
Neal Armstrong. Summary of preliminary prospectus of Cautivo Mining under Spin-Offs & Distributions – Ss. 84(4.1)(a) and (b) distributions of proceeds.
Further fully translated 2015 APFF Roundtable items and current French severed letters are available
Full-text translations of the four French technical interpretations released last Wednesday, as well as of the remaining questions from the 2015 APFF Roundtable (Q.11 to Q. 25), are now available and are listed and briefly described in the table below.
These (and the other translations covering the last 14 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Stock ’94 - European Court of Justice finds that interest on a loan funding a taxable supply of goods was part of the consideration for a single supply of the goods
A Hungarian company was set up to assist Hungarian farmers by lending them money to fund the purchase by them from it of current assets needed in their business. The European Court of Justice (subject to some further findings of facts to be made by the local court) essentially applied the single supply doctrine to find that the loan interest was part of the consideration for the sale of products by the company to the farmers, so that the interest was subject to VAT (even though, of course, interest on loans viewed as being for a separate supply was VAT-exempt). The Court was influenced by the facts that the loan could only be used to fund the purchases from the company (which was their sole purpose), and that the company was not authorized to make loans to anyone other than farmers.
The Tax Court of Canada would not lightly recharacterize a loan and purchase transaction as a deferred purchase price transaction. However, it is not obvious that the Tax Court could not treat interest on the deferred purchase price for a taxable supply as itself being part of the taxable consideration for a single supply.
Neal Armstrong. Summary of Stock ‘94 Szolgáltató Zrt. v Regional Customs and Finance Directorate-General for Southern Transdanubia of the National Tax and Customs Office, Hungary, ECLI:EU:C:2016:936, [2016] EUECJ C-208/15 (European Court of Justice (5th Chamber)) under ETA s. 123(1) - financial service - (f).
The somewhat new Folio on moving expenses does not contain any startling positions
The Folio on moving expenses, which was issued last year, is similar to IT-178R3. It has some added examples, including of an individual who moved for employment reasons from his previous dwelling A in Saskatoon into a temporary residence (dwelling B) in Regina for a few months before being able to possession of his permanent new residence (dwelling C) in Regina, who was not be able to deduct the costs of selling the temporary dwelling B as a moving expense (because the individual did not “ordinarily” reside there) – but nonetheless could deduct most of his moving costs on the basis that there was a move in two stages from dwelling A to C.
A different result occurs under a similar example: an individual moves from Halifax to Brampton to work in downtown Toronto and, after a few months, moves to a central Toronto location to eliminate the long commute. Here, CRA indicates that there was ordinary residence in Brampton, so that the moving expenses going from Brampton to downtown do not qualify.
Neal Armstrong. Summaries of Folio S1-F3-C4 under s. 248(1) – eligible relocation, s. 62(1) and s. 62(3).
Income Tax Severed Letters 25 January 2017
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
North Shore Power - Tax Court of Canada finds that HST was imposed on a customer through the issuance to it of a credit note by an insolvent supplier
A supplier (Menova) received substantial down payments (described as “deposits”) respecting its sale of solar array projects, and then became insolvent before earning more than a fraction of the down payments. Menova then issued “credit memos” to the business customer (North Shore) for the value of the unperformed work, and was petitioned into bankruptcy.
CRA’s position was that the HST included in the credit memos was required to be added back to the net tax of North Shore (thereby effectively reversing the input tax credits previously claimed by North Shore). North Shore argued that “a mere recording of the credit does not meet the test” of a credit note (an argument which was modestly supported by Compagnie Minière Québec Cartier). In rejecting this submission, Bocock J adopted a much broader meaning for credit note, viz. “a note issued by a business indicating that a customer is entitled to be credited by the issuer with a certain amount.” The upshot was that North Shore effectively was denied ITCs for HST that it had incurred for clear commercial purposes (although, to mention another issue, ITCs are only available under s. 169 where property or services have been "acquired.")
In passing, Bocock J also found that the “deposits” were not deposits for HST purposes, stating that they did not represent “payment of earnest money to guarantee the completion of the contracts.”
Neal Armstrong. Summaries of North Shore Power Group Inc. v. The Queen, 2017 TCC 1 under ETA s. 232(3), s. 231(1), s. 168(9).
The Canadian securitization markets have largely settled on a preferred structure for each type of securitized instrument
The most commonly-used lease securitization structure in recent years entails the leased equipment being dropped down to an LP under s. 97(2), with that LP issuing asset-backed notes, either directly to investors or to a conduit trust (that in turn issues commercial paper to investors) - and with that LP using such proceeds to repay a note issued by it on the drop down or returning partnership capital to the lease originator. Because of potential benefits of the LP being a principal business partnership and since the principal leasing business requirement must be met throughout each taxation year “it is common to transfer a few leased pieces of equipment to the [LP] at the time of its formation.” However, principal business partnership status may be in question if the lease originator retains some leased equipment and this is considered to be a business separate from its leasing business carried on “through” the LP.
Where mortgages are securitized by selling undivided co-ownership interests in the pool, the Reg. 7000(2)(b) interest accrual rules typically apply because the co-ownership interests give rise at various times to non-pro-rata entitlements to the mortgage interest that is collected. Although technical difficulties can arise respecting whether these interest accrual rules can dovetail with the net interest income being reduced by servicing fees:
A practical approach is for the certificate holder to report the net amount received and compute the prescribed-debt obligation accrual on the basis of the net amounts. The CRA agrees with this position.
“No significant assessments have come to light in connection with the treatment of the servicing...since...Canada Trustco” (which found that the sale of mortgages on a fully-serviced basis was a single financial supply).
There is a potential conflict in structuring a trade receivables securitization between providing for a true sale and permitting bad debts to be claimed for GST purposes by the vendor.
Neal Armstrong. Summaries of Sabrina Wong and Sania Ilahi, Tax Implications of Asset Securitizations, 2015 CTF Conference Report under Reg. 1100(16), Reg. 1100(2.2)(f), Reg. 7000(2)(b), s. 12(9.1), ETA s. 123(1) – financial service, s. 9 – computation of profit, ETA s. 231(1).
CRA provides an example of the election to claim medical expenses (that are not a prepayment for a future year’s services) on a lagged basis
After noting that fees (e.g., to a dentist) will not be recognized as medical expenses until they are incurred (i.e., the related services are performed (so that, for example, fees prepaid in 2015 for services to be performed in 2016 would not qualify as medical expenses in 2015), CRA went on to confirm (somewhat contrary to an earlier “confusing” 2005 technical interpretation) that for purposes of computing the medical expense tax credit ("MEC") in s. 118.2(1) for a year, an individual may choose any 12-month period ending in the year, but that the medical expenses must have been paid during the period so chosen. For example, if dental fees were paid on December 31, 2015, they would not be eligible for the METC computation for the 2016 taxation year if the individual had selected the calendar year, but such fees could be included in the computation of the METC in the 2016 return if the selected period included December 31, 2015.
Neal Armstrong. Summaries of 6 December 2016 External T.I. 2015-0589041E5 Tr under s. 118.2(1) and s. 118.2(2)(a).
TransAlta Corporation’s proposed restructuring of its preferred shares would let holders choose between a taxable exchange and s. 51 rollover
TransAlta Corporation currently has five series of Preferred Shares outstanding (Series A, B, C, E and G) which are trading at a substantial discount to the $25.00 price at which they originally were issued. TransAlta is proposing a Plan of Arrangement under which the holders of each series would exchange each of their current shares for a fraction of a new series of preferred shares (also with a redemption amount of $25.00 per share). These Series 1 Preferred Shares are expected to trade closer to $25.00 on the basis of more favourable dividend terms, so that TransAlta anticipates that the preferred shareholders’ holdings will trade higher even though there would be a reduction in the redemption amount of their shareholdings.
The preferred shareholders are given the option of having their exchange occur on a taxable basis (rather than on a non-disposition basis under s. 51) by permitting them to elect to have each share exchanged for a “Redemption Note,” which would then be immediately exchanged under the Plan of Arrangement for the proffered fraction of a Series 1 Preferred Share.
Neal Armstrong. Summary of TransAlta Corporation Circular under Other – Recapitalizations or note/pref exchanges – Prefs for prefs.
CRA discusses the interrelationship between s. 15(1.4)(c) and s. 246(1)
Opco is held somewhat equally by three holding companies, each wholly-owned by an individual (A, B or C) who is unrelated to the others. Opco sells an asset to B’s child for 1/2 its fair market value. CRA found that:
- If the benefit conferred by Opco on B’s child was not also indirectly conferred by B’s holding company (Holdco B) on B or B’s child, then such benefit would be deemed by s. 15(1.4)(c) to be a benefit conferred on Holdco B by Opco, so that it would be included in Holdco B’s income.
- On the other hand, if the benefit had been indirectly conferred by Holdco B on B or B’s child (which CRA would generally infer if Holdco B influenced Opco’s conferral of the benefit), s. 246(1) could apply to include the benefit in B's income.
- If Holdco B had concurred in the benefit conferral, s. 56(2) could be an alternative basis for including the benefit in Holdco B’s income.
CRA did not discuss what criteria it would apply to determine whether it would assess Holdco B, or B, for the benefit (or even do both).
Neal Armstrong. Summaries of 6 December 2016 External T.I. 2016-0666841E5 Tr under s. 15(1.4)(c) and s. 56(2).