News of Note
CRA maintains its policy on LLCs as corporations
Email this ContentCRA essentially indicated that Anson has not changed its view that an LLC is a corporation for purposes of the Act. (CRA was obliged to point out that it has not examined all the LLC statues or even changes to ones that it previously has examined, but did not communicate that this was a big deal).
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 7(a) under 2015 CTF Roundtable.
CRA finds that a Canadian parent realizes income if an upstream loan owing by it is extinguished on winding up a CFA
A loan from a foreign affiliate to its Canadian parent generally must be repaid within two years lest the amount of the loan be included in the parent’s income under s. 90(6). CRA was asked whether this payment requirement would be considered to be satisfied if the foreign affiliate is wound up (perhaps on the basis that there is an implicit set-off between the amount owing by the parent and the winding-up distribution payable by the foreign affiliate - see e.g., 2013 Ruling 2013-0498551R3).
CRA indicated that it was not prepared to attempt to provide an administrative solution to this problem (so that such income inclusion would occur under current law) and had drawn this issue to the attention of Finance.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 8 under 2015 CTF Roundtable.
CRA is revoking rulings on conversions of three year bonus unit plans (RSUs) to DSUs
CRA at one point had been providing rulings accommodating the conversion of three-year bonus unit plans (under para. (k) of the salary deferral arrangement rules) into deferred share unit plans (intended to be governed by Reg. 6801(d)) (See e.g. 2005-0144541R3). CRA has now concluded that the Act does not accommodate this flexibility and has revoked or will revoke such rulings. Units that were already in the bonus plan prior to the revocation can still be converted.
Plans established under 409A of the Code permit a more flexible range of events giving rise to a distribution entitlement than is permitted under the DSU rules in Reg. 6801(d). A Canadian employee who is a member of such a plan will be required to comply with the more restrictive Canadian rules.
Edited transcripts of the answers given today at the annual CTF Roundtable are being uploaded over the next several days.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 2 under 2015 CTF Roundtable.
Killam is converting to a REIT with a limited rollover option
Killam is proposing to effectively convert to a REIT (although, very unusually no statement is made that management actually expects it to qualify as a REIT). Most of its shareholders will exchange their shares for units of the REIT on a taxable basis. However, up to 20% of the shares may instead be exchanged on a s. 97(2) rollover basis for exchangeable units of a subsidiary LP into which Killam will be dropped, with the REIT backstopping the exchange obligations of the LP under an Exchange Agreement.
In order that the subsidiary LP will be an "excluded subsidiary" (i.e., within a safe harbour from the SIFT rules), those electing rollover treatment generally must be taxable Canadian corporations - so that individuals wishing to elect would need to transfer their shares first to a holding company. Killam will then be transferred to a Newco for consideration including an interest-bearing note, followed by their amalgamation, in order to shelter the rental income of the properties now held by Killam through a lower-tier LP.
Convertible debentures of Killam (bearing interest of around 5.5%) will simply be assumed by the REIT in consideration for the issuance of a note to it by Killam.
Neal Armstrong. Summary of Killam Properties Circular under Offerings - REIT and LP Offerings - Domestic REITs.
Tribute Pharmaceutical proposes an inversion transaction with Pozen resulting in both corporations becoming indirect wholly-owned subsidiaries of a new public Irish holding company
A Circular of Tribute Pharmaceuticals (a Canadian public company) dated November 6, 2015 describes a proposed inversion transaction with Pozen, a Delaware public company, which would result in both companies being held through an Irish holding company (Parent), with Pozen and Tribute shareholders holding approximately 63% and 37% of the shares of Parent, respectively, before giving effect to a subsequent financing. To achieve this structure, Pozen would cause Parent to be incorporated, "Ltd2" (an Irish private limited company) would be incorporated as a direct, wholly-owned subsidiary of Parent, and each of US Merger Sub and Can Merger Sub would be incorporated as sister corporations and subsequently transferred to become direct, wholly-owned subsidiaries of Ltd2. Can Merger Sub would acquire all of the outstanding common shares of Tribute under an OBCA arrangement in exchange for delivering Parent shares, and US Merger Sub would be merged with and into Pozen under a Delaware merger, with Pozen as the survivor.
The transaction (targeted to be completed by year-end) is conditional on an opinion from Pozen's special tax counsel to the effect that Code s. 7874, existing regulations promulgated thereunder, and official interpretation thereof should not apply so as to cause Parent to be treated as a U.S. corporation for Code purposes.
An Irish holding company also was used in the somewhat more intricate Endo/Paladin inversion transaction.
Neal Armstrong. Summary of Tribute Pharmaceuticals Circular under Other – Inversions.
Elim Housing Society – Tax Court of Canada finds that a nursing home for those with dementia qualified for the enhanced public service body HST rebate
Woods J found that a B.C. long-term care facility, whose residents mostly had dementia, severely impaired mobility, complex medical issues and a life expectancy of between three months and three years, was making "facility supplies," so that it was eligible for the enhanced 83% public service body HST rebate. This likely overrules 3 July 2012 Ruling 109082 (re a nursing home).
Although there were a number of significant and novel interpretive issues to resolve, the "gist of the dispute… [was] whether the services provided by care aides…, such as toileting and bathing, [were] therapeutic health care services." Woods J found that it was sufficient that these care aide services were provided at the direction of the on-site nurses "to address particular medical concerns."
Neal Armstrong. Summary of Elim Housing Society v. The Queen, 2015 TCC 282 under ETA s. 259(1) – facility operator.
Canada Life – Ontario Superior Court grants requested detailed rectification of an LP wind-up so as to avoid a s. 98(5) rollover
A Canada Life subsidiary (CLICC) clearly intended to realize an accrued loss on its LP interest in a subsidiary partnership by winding it up. CRA reassessed to deny the loss on the basis that the s. 98(5) rollover applied.
Pattillo J granted the requested order that the transactions be deemed to occur as requested by CLICC so that the rollover did not apply, notwithstanding a Crown complaint that the number of proposed rectification transactions was two more than had originally occurred. He noted that arguments that rectification was restricted to correcting mistakes in the instruments used to implement a definite and ascertainable tax plan had been rejected in Fairmont.
Neal Armstrong. Summary of Canada Life Insurance Co. of Canada v. A.G of Canada, 2015 ONSC 281, under General Concepts – Rectification.
CRA rules that legal fees incurred for the purpose of receiving compensation for lost business profits give rise to non-creditable GST
CRA has ruled that legal services provided to a business in successfully suing for lost business profits did not qualify as giving rise to an input tax credit for the HST on the resulting legal fees. CRA reasoned that the resulting settlement was merely "compensatory," so that the legal services were not received for the purpose of making taxable supplies for consideration, as required by ETA s. 141.01(2).
This may illustrate that (at least in CRA’s view) ETA s. 141.01(2), in this respect, is narrower than ITA s. 18(1)(a). Under the surrogatum principle, compensation for lost business profits itself has the character of business income, so that legal fees incurred to generate such compensation should be deductible under ss. 18(1)(a) and 9.
Neal Armstrong. Summary of 1 May 2015 Ruling 164658 under ETA s. 141.01(2).
CRA finds that the connection test in XXIX-A(3) of U.S. Treaty can be satisfied by funding interest to a non-qualifying U.S. parent, on a loan whose use had nothing to do with a connected Canadian business, out of the cash flows generated by that business
Para. XXIX-A(3) of the Canada-U.S. Treaty lets a U.S. resident which is not a qualifying person access Treaty benefits (e.g., no withholding on non-arm’s length interest) if it satisfies a three-prong active trade or business test. One of these tests (the "Connected Test") is that the item of income, for which the Treaty benefit is sought, is derived from the source state (Canada) in connection with or incidental to the (U.S.) actively-conducted trade or business of the U.S. person - including any such income derived directly or indirectly by that U.S. person through a person that is resident in Canada.
A U.S. person who was not a qualifying person (US-Holdco1) lent money to a direct or indirect Canadian subsidiary (Canco, carrying on a connected business) to help fund the purchase by Canco (through an intermediate structure) of a non-North American target. CRA considered that the Connected Test could be satisfied so as to permit the interest on the loan to enjoy the Treaty exemption, even though the lent money was not used in Canco's business, if the interest payments were funded out of the cash flow from that business. Conversely, if the interest payments to US-Holdco1 were partially funded from foreign affiliate dividends, no relief would be available under para. XXIX-A(3).
Neal Armstrong. Summary of 5 November 2015 Memo 2013-0496401I7 under Treaties - Art. 29A.
Income Tax Severed Letters 18 November 2015
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.