News of Note
Nuvo Research butterfly includes amalgamation of transferee corporation
Email this ContentNuvo Research, a small-cap TSX pharmaceutical company, is proposing to effect a butterfly spin-off of its drug development business (and retain its more mature cash-positive drug business). Similarly to the DeeThree spin-off of Boulder Energy, and in contrast to the FirstService/Collier butterfly spin-off, apparently no tax ruling was sought, no indemnities are being given respecting post-Arrangement actions that might cause the butterfly to be taxable and no tax risks are disclosed.
Unusually, the transferee corporation will amalgamate with the distributed subsidiary as part of the butterfly Plan of Arrangement. As the amalgamated corporation (Crescita) cannot be the transferee corporation (see Read), this means that the butterfly reorganization is intended to finish before the amalgamation (see 1996 CMTC Roundtable, Q. 16).
Similarly to the other two recent butterflies, the U.S. tax disclosure contemplates that the reorganization can be treated as a qualifying Code s. 355 distribution on the basis of the form of the transactions being disregarded – and (with less than excessive zeal) states that “it would be reasonable for U.S. Holders to take the position that Section 355 of the Code will apply.”
Neal Armstrong. Summary of Nuvo Research Circular under Spin-Offs and Distributions – Butterfly spin-offs.
CRA rules on plan marrying a US beneficiary’s objective of realizing a Code s. 331 capital gain on a redemption of bequeathed Canco shares (coupled with estate loss carried back under ITA s. 164(6)) and Canadian beneficiaries’ objective of a pipeline strip of Canco
CRA has often ruled that s. 84(2) will not apply to "pipeline" transactions in which shares of a private company (say, “A Co”), which have been stepped up on death without using the capital gains exemption, are sold by the estate to a new estate subsidiary (Newco) for a promissory note of Newco, Newco and A Co amalgamate a year later, the promissory note is repaid out of the Amalco assets over the following year and the proceeds thereof distributed by the estate to its resident beneficiaries.
A ruling dealt with the complications arising when one of the beneficiaries (“Child 2”) was a U.S. resident and A Co (a portfolio trading company) was a PFIC. The transactions contemplated that A Co redeems a portion of its shares held by the estate, thereby giving rise to a deemed dividend and to a capital loss which can be carried back under s. 164(6) to partially offset some of the terminal year capital gain on the A Co shares – and that such redemption proceeds are allocated and paid (less Part XIII withholding) by the estate to Child 2 through the issuance of a promissory note. The estate then engages in a conventional pipeline transaction (as described above) for the benefit of its resident beneficiaries.
The ruling letter indicates that an objective of the transactions “is to remove Child 2 as a shareholder of A Co in a manner that will ensure that he can receive any distribution from A Co as a capital gain for United States income tax purposes and avoid the complications and negative tax consequences resulting from being a United States resident shareholder of a PFIC.” (The estate acquired its A Co shares with a stepped up basis and they could then be disposed of with no gain being recognized, provided that dividend treatment was avoided through receiving Code s. 331 liquidation treatment.) Accordingly, all the transactions are being undertaken for Code purposes as a “Plan of Liquidation” of A Co, so that Child 2 can enjoy capital gains treatment under s. 331 on his distributions. Among other things, this is stated to depend on Amalco being “dissolved within a reasonable time” following the share repurchase by A Co – so that the transactions contemplate that Amalco will be dissolved fairly soon after the two-year period mandated by CRA for implementing pipeline transactions.
Rather curiously, the CRA ruling summary indicates that the principal issue is "whether estate can elect under subsection 164(6) where there is a non-resident beneficiary" – but no s. 164(6) ruling was given.
Neal Armstrong and Abe Leitner. Summaries of 2015 Ruling 2015-0569891R3 under s. 84(2) and s. 164(6).
CRA considers that it still is not required to give notice of its determination to register a taxpayer for GST purposes
New ss. 241(1.3) to (1.5) of the ETA contemplate that CRA can register a person whom it suspects of being required to be registered for GST purposes after giving 60 days’ notice, but with the effective date of the registration to be no earlier than 60 days after giving such notice. CRA considers that these provisions do not interfere with its current practice of simply assigning a GST/HST registration number to someone who should have been registered, and then assessing the person under that number for unremitted net tax – and notes that “CRA could still assess that person under paragraph 296(1)(a) of the ETA for unremitted net tax in respect of reporting periods prior to that person’s effective registration date.”
CRA also acknowledges that when the taxpayer is registered, it generally is entitled to claim input tax credits in its first post-registration return for GST that was previously incurred while it was a registrant (i.e., required to be registered.)
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 23 under ETA s. 241(1.5) and of 26 February 2015 CBA Roundtable, Q. 33 under s. 169(1).
CRA indicates that the interpretation of “closely-related” for GST purposes should be informed by the policy that 90% common ownership is covered
ETA s. 128(1)(a) provides that two corporations are “closely related” if the first corporation owns 90% or more of the value and number of the issued and outstanding shares of the capital stock of the second corporation having full voting rights under all circumstances. Accordingly, it is obvious that if 100% of the voting shares and non-voting shares of Corporation C are held by Corporations A and B, respectively, Corporations B and C are not closely related. When asked about this CRA, rather than conceding the point, stated:
It is important to note that the explanatory notes to section 128… refer to a degree of common ownership of at least 90%. Furthermore, the determination of “closely related” is relevant for purposes of the elections under sections 150 and 156… . The explanatory notes to these provisions refer to wholly-owned corporations. Any application of the provisions of section 128… to a particular fact situation should be consistent with the policy intent of the provision.
This illustrates that on the GST side, CRA is generally more reluctant to concede that the ordinary meaning of the statutory wording, if unambiguous, controls the interpretation (see, e.g., Quinco), than for the Income Tax Rulings Directorate.
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 20 under ETA s. 128(1)(a).
CRA states that the ETA s. 167 election “could be available” on an ITA s. 98(5) wind-up
CRA has indicated that an ETA s. 167 election is not available where a partnership is wound up under ITA s. 98(3), as each partner receives an undivided interest in the partnership property, so that there is not a supply of the business to one recipient. When asked about a s. 98(5) wind-up, CRA gave a very guarded response (perhaps reflecting diffidence about opining on income tax rollovers), stating:
Where the disposition of 100% of the partnership property from the partnership to the former member constitutes the supply of a business, and where an agreement for a supply of the business from the partnership, as supplier, to the former member exists, an election under subsection 167(1)… could be available, provided the conditions for the election are met.
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 19 under ETA s. 167(1).
Marra – Tax Court of Canada finds that the two years for a director’s derivative assessment ran from handing a resignation to the company’s lawyer, who did nothing with it
The company (financed by your spouse but which has been run by a questionable character) is on shaky grounds, your spouse has suggested that you resign and the only other directors are the shady character, who is being sued for having misappropriated company funds, and his inactive spouse. What do you do?
Rip J found that in these circumstances it is sufficient to hand a written resignation to the lawyer who has acted for the company, even though he never gets around to filing the resignation in the minute book (or notifying the company's branch of the resignation, as required) – so that from the time of giving him the resignation, the two year period for barring CRA from making a derivative assessment under ITA s. 227.1(4) and ETA s. 323(5) starts running.
Neal Armstrong. Summary of Marra v. The Queen, 2016 TCC 24 under ITA s. 227.1(4).
Marzen Artistic – Federal Court of Appeal confirms that a simplistic transfer pricing scheme is difficult to defend
The taxpayer, a Canadian window manufacturer which sold its windows in B.C. and the U.S., generated virtually all of its profits in its Barbadian subsidiary (SII), which essentially had no assets or employees other than its (very part-time) Barbadian managing director: the taxpayer sold windows for the U.S. market to its U.S. subsidiary ("SWI") at their retail price (i.e., the IRS was not expected to receive any income tax either); SII charged "marketing fees" to the taxpayer which were sufficient to reduce the taxpayer’s income to nil; SII paid fees to SWI for the SWI employees ("seconded" to SII) who did the marketing work at SWI’s payroll cost plus 10%; and SII paid dividends (out of exempt earnings generated from the substantial mark-up of its fees over those of SWI) to the taxpayer which essentially were equal to 100% of the profit of the consolidated group.
The Federal Court of Appeal has not found anything to reverse in the approach that Sheridan J took in the Tax Court, which was to apply s. 247(2)(c) to reduce the marketing fees to the sum of: the fees paid by SII to SWI; and those paid to its managing director (which she treated as the comparable uncontrolled price for SII’s services to the taxpayer) - so that virtually all of the consolidated profits were taxable in Canada. In response to a submission that Sheridan J had “erred in under-valuing the amounts paid by SII to SWI," (i.e., some of the Barbados profits assessed by CRA really belonged in the U.S.), Scott JA refrained from editorial comment, and instead simply noted that no evidence had been advanced at trial in its support.
Neal Armstrong. Summaries of Marzen Artistic Aluminum v. The Queen, 2016 FCA 34, under s. 247(2).
CRA considers that a Netherlands Antilles private foundation qualifies as a trust notwithstanding its separate legal personality
Although a Netherlands Antilles private foundation has separate legal personality (including a separate legal entity clause in the governing legislation) and capacity to acquire rights and liabilities (with no beneficiary liability), CRA nonetheless considers it to be a trust rather than a corporation given that it does not issue shares, the beneficiaries do not pay for their interests in the foundation, they cannot transfer their beneficial interests and they do not have a right to participate in any decisions of the foundation. Although it is still quite dissimilar to a common law trust, it is good enough that it is somewhat similar to a civil law trust.
Neal Armstrong. Summary of 4 October 2010 Memo 2008-0289461I7 under s. 104(1).
ConocoPhillips – Federal Court finds that CRA effectively has the discretion under s. 220(2.1) to indefinitely extend the period for filing a Notice of Objection
S. 220(2.1) provides that “where any provision of this Act… requires a person to file a… document…the Minister may waive the requirement, but the person shall provide the document…at the Minister’s request.” Boswell J has found that s. 220(2.1) accords the Minister the discretion to waive the requirement to file a Notice of Objection. Thus, it was improper for CRA to peremptorily reject (on the grounds that it had no power to do so) a ConocoPhillips request that CRA waive a requirement for it to object to a reassessment which ConocoPhillips found out about well after the deadline for getting an extension to object to it.
What does this mean? Boswell J indicated that if CRA waived the requirement for filing a Notice of Objection, it was then empowered by s. 220(2.1) to request the waived document (i.e., to request ConocoPhillips to file a Notice of Objection), so that the appeals process could get back on track – and noted that “should the Minister in this case unreasonably refuse to exercise her jurisdiction and authority to waive the requirement for a notice of objection, ConocoPhillips could then challenge that refusal by way of judicial review in this Court.”
Neal Armstrong. Summaries of ConocoPhillips Canada Resources Corp. v. M.N.R., 2016 FC 98 under s. 220(2.1) and Statutory Interpretation - French and English versions.
CRA doubts the GST free-supply rule provides ITCs to holdcos providing free management to operating subs which generate interest/dividends
A 2004 Interpretation (54669) indicated that a holding corporation supplying management services to related corporations with operating businesses or other exclusive commercial activity could claim ITCs to recover the GST on the expenses incurred in such management activities under the “free supply” rule in ETA s. 141.01(4).
More recently, CRA has substantially qualified this view by confirming that it would consider that “where a person provides property or a service to a person for no consideration but receives interest or dividend revenue from that person it is unlikely that ITCs would be available.” Based on an earlier comment, CRA's rationale might be that although the direct purpose of the management services is to further the operating business (which arguably is all that matters), the indirect purpose of promoting financial returns to the holding corporation (e.g., dividends) should govern.
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 34 under ETA s. 141.01(4).