News of Note
CRA finds that a day-trading MFT can allocate capital gains to its unitholders
Email this ContentA mutual fund trust which engages in day trading on margin in Canadian securities nonetheless can make the election under s. 39(4) for capital gains treatment, and make a s. 104(21) designations on its distributions so that its unitholders (including, apparently, traders such as investment dealers) will receive capital gains treatment on the distributions. However, making the election may suggest that the mutual fund trust's expenses do not satisfy the income-producing purpose test in s. 18(1)(a) (although this may not matter in light of specific expense deduction provisions such as s. 20(1)(bb)).
Day trading generally would not be inconsistent with having an undertaking of investing its funds in property as required by s. 132(6).
Neal Armstrong. Summaries of 24 March 2015 T.I. 2012-0470991E5 F under s. 39(5)(a), s. 132(6) and s. 9 – capital gain v. profit – shares.
CRA implicitly finds that creditors’ approval of a CCAA plan of compromise for a trust which was economically captive to them did not cause them to act in concert
CDS trusts entered into credit default swaps with counterparties desiring credit protection for their bond portfolios and funded their purchase of the required collateral for their CDS obligations by issuing short-term notes. Most or all of these trusts defaulted on their notes in the 2008 financial crisis.
One such trust settled litigation with its non-resident CDS counterparty (the "Bank") under a compromise which was voted on and approved by the Noteholders under a CCAA plan. Under this settlement, the Bank made payments under the CDS, which were applied by the Trust to repay all of the unpaid Note principal but only a portion of the unpaid interest (with recourse for such interest obligations being specified in the CCAA plan to be only to the Trust assets.) In the meantime, the Bank had acquired some of the Notes directly and through non-resident subsidiaries.
CRA ruled that interest so paid to the Bank and its subs was not "participating debt interest," stating that the fact that the interest paid was "based on the available cash in the Trust…does not impact the conclusion that the interest… is not being computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion."
CRA also ruled that the entering by the Bank and its subs into the settlement would not by itself result in their being considered to not deal at arm's length with the Trust. This did not directly address the more interesting issue of whether the Noteholders collectively (and, therefore, perhaps each Noteholder, such as the Bank, individually) should be considered to be not dealing at arm’s length with the Trust having regard to the Trust being economically captive to its Noteholders (i.e., no one else in the circumstances could receive any Trust distribution). However, this ruling may imply that CRA was comfortable with this issue, which sounds right given that voting on the Plan and entering into the settlement should not by itself be sufficient to conclude that the Noteholders acted in concert respecting the Trust.
Neal Armstrong. Summary of 2014 Ruling 2014-0539791R3 under s. 212(1)(b).
CRA confirms that the s. 40(3.6) stop-loss rules should not apply to a CFA winding-up
In 2014-0538591I7, CRA indicated that s. 40(3.6) did not apply to deny a loss realized on the winding-up of a controlled foreign affiliate because (1) s. 69(5)(d) specifically ousts the application of s. 40(3.6) respecting property (the CFA’s shares) disposed of on a winding-up, and (2) it is unlikely that under the foreign corporate law the CFA would be considered to still exist immediately after that disposition.
CRA now recognizes that the first point was wrong, as s. 88(3) by its terms "operates notwithstanding subsection 69(5)," but stands by the second point, stating "we would expect that, under the foreign corporate law, the CFA would cease to exist and its shares would simultaneously be cancelled when the CFA was wound-up."
Neal Armstrong. Summary of 12 January 2015 Memo 2014-0560421I7 under s. 40(3.6).
CRA considers that the RSU exclusion does not apply where the participant will be able to cash out additional RSU units based on dividend equivalents
The definition of a salary deferral arrangement exclude "a plan or arrangement under which a taxpayer has a right to receive a bonus or similar payment in respect of services rendered by the taxpayer in a taxation year to be paid within 3 years following the end of the year." CRA considers that this exclusion does not apply to a dividend equivalency feature of a restricted stock units plan under which the employee is credited with additional RSU units based on the amount of dividends paid on the underlying shares, with those units to be cashed out at the same time that the related primary RSUs are exercised to acquire shares.
Neal Armstrong. Summary of 29 March 2015 T.I 2014-0526941E5 under s. 248(1) – salary deferral arrangement - para. (k).
CRA recognizes that the s. 7 rules apply to agreements to sell shares for no cash consideration
CRA recognizes (e.g., in IT-113R4, para. 7) that the s. 7 rules can apply where an employer issues its shares to an employee for no monetary consideration. After up to three years of deliberation, CRA has concluded that the s. 7 rules can also apply to an employee incentive arrangement under which an employer purchases shares of a non-arm's length corporation (e.g., an open-market purchase of its non-resident parent’s shares) and grants those shares to the employees for no monetary consideration.
Neal Armstrong. Summary of 24 March 2015 T.I. 2012-0432951E5 F under s. 7(1)(a).
The Hong Kong treaty qualifies as an agreement with the government of another country
Various ITA provisions reference the concept of an agreement with, or with the government of, another country. CRA considers that the Agreement with Hong Kong so qualifies.
Neal Armstrong. Summary of 25 March 2015 T.I. 2014-0560351E5 under s. 248(1) – tax treaty.
Income Tax Severed Letters 22 April 2015
This morning's release of 20 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA sets out conditions for paying a refund, previously owing to a dissolved sub, to the parent
CRA’s starting point is to consider that when a sub has been wound up into its parent and dissolved, its right to receive a refund of an overpayment also ceases. However, if "all returns have been filed up to the date of dissolution, the articles of dissolution indicate that the corporation will distribute its assets to the shareholder…after satisfying its creditors [the articles of dissolution will not state this but presumably a general conveyance will do the trick],… the shareholder is the rightful owner of the funds and the sole shareholder completes and returns a signed ‘Release and Indemnification' form to the CRA," then CRA "may" issue the refund to the parent.
Neal Armstrong. Summary of 18 November 2014 TEI Roundtable, Q. E.4 under s. 164(1).
NorthWest International Healthcare REIT is being merged under s. 132.2 into NorthWest Healthcare REIT
NorthWest International Healthcare REIT, which holds its international portfolio through a subsidiary Ontario LP with an exchangeable unit structure is being merged under s. 132.2 into NorthWest Healthcare REIT. Although there principally are Ontario entities involved, Alberta is an easier jurisdiction for obtaining a non-corporate plan of arrangement than perhaps Ontario. In order to qualify as an Alberta plan of arrangement, some minor transactions involving an Alberta asset manager were inserted.
Newer-style exchangeable units are to be created: an affiliated group holding a 65% economic interest in NWI will exchange (under s. 97(2)) their exchangeable units in the subsidiary LP of NWI for units of that LP which are redeemable for NWH units.
NWI and NWH are seeking CRA approval to change the fiscal year ends of various subsidiaries so that their income earned up to the effective date will be allocated to the respective NWI and NWH unitholders.
Neal Armstrong. Summary of NorthWest International Healthcare and NorthWest Healthcare REIT Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – REIT Mergers.
Slate U.S. Opportunity (No. 3) Realty Trust will be merged into Slate Retail REIT
It is proposed that Slate U.S. Opportunity (No. 3) Realty Trust ("SUSO 3") be merged into Slate Retail REIT using the standard s. 132.2 merger mechanics. They have the same manager and focus on the same type of US real estate.
Somewhat unusually, the number of Slate REIT units to be received by SUSO 3 unitholders will be subject to a working capital adjustment to be determined immediately before the merger. The merger is not occurring pursuant to a plan of arrangement (which in most other merger contexts is required in order to avoid the need to file a US registration statement) – perhaps because the units of SUSO 3 are unlisted.
Neal Armstrong. Summary of Slate U.S. Opportunity (No. 3) Realty Trust under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – REIT Mergers.