News of Note

When Foreign Pubco is planning to spin off some of its assets in the form of Foreign Spinco, there will be various points to consider respecting a potential preceding butterfly transfer of the Canadian spin-off assets by a Canadian subsidiary (DC) to a transferee corporation subsidiary of Foreign Spinco (TC), including:

1. Other "spin" assets would need to be contributed to Foreign Spinco before the butterfly of the Canadian "spin" business assets, in order to ensure that the Foreign Spinco shares never derived 10% or more of their FMV from the TC shares.
2. Given the relatively narrow meaning accorded to "reorganization" by CRA, in the context of a cross-border butterfly, one need only ensure that the series of transactions or events does not include prohibited transactions or events described in 55(3.1)(a) or 55(3.1)(b), “and the continuity of interests rules in paragraphs 55(3.1)(c) and (d) should be largely irrelevant.”
3. A "reverse" foreign spin-off, where the "keep" assets are butterflied to TC as part of the usual three-party share exchange and the Foreign Spinco that is distributed to the Foreign Pubco shareholders is the existing shareholder of DC, likely will not work – unless, for example, Foreign Spinco held the DC shares through a single purpose foreign holding company.
4. The standard three-party exchange mechanics do not accommodate the foreign shareholder transferring the DC shares on a s. 85 rollover basis, so that it is problematic if the DC shares are taxable Canadian property with an accrued gain.
5. Although CRA does not believe that a transaction can qualify as a "permitted exchange" if preferred shareholders of DC do not participate in the butterfly, it nonetheless may be that the FMV of the Foreign Spinco shares should be conisdered to "approximate" the amount determined under the "permitted exchange" formula where this difficulty arises.
6. A one-way cash adjustment mechanism was accepted in 2014-0530961R3 and 2013-0491651R3.
7. Although, under GAAP, a pro rata portion of DC’s retained earnings likely will be transferred onto the balance sheet of TC, this cannot occur as of the very beginning of TC’s taxation year, so that TC for its first year cannot “use” its retained earnings for thin cap purposes. Accordingly, TC might determine to have a year-end immediately after the butterfly.

Neal Armstrong. Summaries of Christian Desjardins and Nik Diksic, "Cross-Border Butterflies in the Context of Public Spin-Off Transactions", Draft 2015 CTF Annual Conference paper under s. 55(3.1)(b) and s. 55(1) – distribution.

A husband-wife team owned and managed a construction firm doing work in the general Vancouver area with the husband managing the business development and construction work and the wife handling the administrative and human resources work. In order to take advantage of her being a status Indian (he was not), the admin office was moved to the reserve which was closest to Vancouver. (Her own band was on a different reserve.)

The Crown did not challenge the Indian Act exemption for the regular salary paid to her (of approximately $100,000 per annum, which approximated her husband’s salary), nor did it challenge the deductibility of the bonusing of all of the firm’s remaining profits to her, including a $2 million bonus in 2008, but did challenge the exemption to her of those bonuses.

In finding that her bonuses were taxable to the taxpayer, Woods J found that there was no evidence that they were reasonably intended to compensate her for her duties of employment and, in particular, no evidence that her contribution was greater than her husband’s - and found, more generally, that there was no substantive connection between the reserve lands and the bonuses. However, she went on to note obiter that “if an Indian chooses to situate property on a reserve, the income should qualify for the exemption regardless of the individual’s motivation for doing so,” i.e., “the payment of the bonuses is abusive, but it is not abusive to locate the office on a reserve.”

It is not clear what she would have done if she had also been considering whether s. 67 denied the deduction of half or all of the bonuses, nor was she asked to address whether GAAR can apply to accessing the Indian Act exemption.

Neal Armstrong. Summary of Bell v. The Queen, 2016 TCC 175 under Indian Act, s. 87 and ITA. s. 67.

Where the death of an annuitant under a RRIF is followed very shortly by the death of the surviving spouse, CRA accepts that the (briefly) surviving spouse will qualify as an annuitant under the RRIF provided that the predeceased spouse had so designated the survivor by will or in the RRIF contract – even if the surviving spouse did not receive any annuity payments before his or her death. This means that the deemed inclusion of the fair market value of the fund property will be in the hands of the second-to-die of the two spouses – except to the extent that there then is a transfer out of the fund to a financially dependent child or other eligible beneficiary (in which case, the eligible amount of the transfer is included in the transferee’s income under s. 146.3(5)(a).)

Neal Armstrong. Summaries of 2015-0592681E5 Tr under s. 146.3(1) – annuitant and s. 146.3(6.2).

An Australian Superannuation Fund (or “Super Fund”) is a government-regulated trust that has been registered and approved by the Australian Government and is funded by contributions from employers and individuals over their working lives in order to provide retirement incomes. As the investment earnings within the Super Fund are subject to Australian tax (albeit, at a favourable rate), it does not qualify as an “exempt trust,” so that a Canadian beneficiary’s interest is considered to be specified foreign property, and the individual is required to file T1135s reporting inter alia the “cost amount” of the individual’s interest in the fund.

“Cost amount” in the case of a right (other than capital property) to receive an amount is defined as such amount. CRA stated that such amounts “include all amounts… which the individual has a legal right to receive, even if the amounts are to be received in the future,” and then stated:

[W]here it is not possible to determine the cost amount of a specified foreign property, taxpayers should use their best efforts to reasonably estimate the cost amount of the property. [CRA] will not penalize taxpayers who have made reasonable estimates based on the best available information. The onus is on the taxpayer to demonstrate the reasonableness of any such estimates, if requested.

It is unclear how closely this concept of “reasonable estimates based on the best available information” aligns with the jurisprudential concept of a due diligence defence to penalties, such as the penalty under s. 162(7) which (as interpreted in 2012-0458401I7) normally applies to materially incomplete T1135s (see Kokanee).

Neal Armstrong. Summaries of 2015-0595461E5 under s. 233.3(1) – specified foreign property - (n), s. 248(1) – cost amount – (e), s. 162(7).