News of Note
Nortel – Ontario Superior Court of Justice applies the proposition that the OECD transfer pricing guidelines require the assessment of risk sharing on an ex ante basis
Email this ContentUnder Nortel's transfer pricing methodology, the entities performing R&D, including Nortel itself and a UK subsidiary, were entitled to all residual profits after payment of returns to the Nortel subsidiaries that performed sales and distribution functions. The related agreement specified that restructuring costs incurred by each R&D subsidiary were not to be shared.
Following Nortel’s insolvency, Newbould J. rejected various submissions made by the administrators of the pension plan for the UK subsidiary respecting transfer pricing, including that this arrangement failed to properly compensate the UK subsidiary for its restructuring costs. He accepted the monitor’s position that "Chapter 9 of the OECD Guidelines explicitly frames the issue of restructuring costs and benefits as a question of ex ante risk allocation by way of an intercompany contract, rather than an ex post examination of who should bear the realization of a risk (i.e., restructuring costs)." Accordingly, as this cost-bearing clause satisfied the arm’s length standard at the time of the agreement, its actual operation following an unanticipated insolvency was not a basis for overturning it.
Furthermore, the approach of the claimants’ expert that "one starts with the economic substance and then looks to see if the legal form follows the economic substance" was "the opposite of what the OECD Guidelines call for."
Neal Armstrong. Summary of Re Nortel Networks Corp., 2014 ONSC 6973 under Treaties – Art. 9.
CRA maintains its positions on s. 85.1(1) in its new Folio
CRA has rewritten IT-450R – "Share for Share Exchange" to use somewhat more pasteurized and laconic prose, but without making any substantive changes - except that a statement has been added that a right to receive shares of the purchaser in the future is treated the same as boot. (Presumably, CRA would not intend to make an issue of this statement respecting a Plan of Arrangement which stated that every listed step shall be deemed to occur at five minute intervals.)
Positions maintained in the new Folio include:
- the s. 85.1 rollover can apply to an exchange of x% of each vendor share for a purchaser vendor share, with (100%-X%) of each share being exchanged for boot, provided that this is clearly specified in the purchaser’s offer
- up to $200 in cash can be received in lieu of fractional shares of the purchaser
Neal Armstrong. Summaries of S4-F5-C1: "Share for Share Exchange" under s. 85.1(1), s. 85.1(2.1) and ITAR 26(26).
Rae – Federal Court refuses to certify a class action for CRA's delays in assessing returns claiming gifting tax shelter credits.
CRA has held in abeyance the processing of 2012 and 2013 tax returns which claimed tax credits from 12 mass-marketed gifting tax shelters (8 for 2012, and 4 for 2013).
The Federal Court declined to certify a class action, based on the failure of CRA to assess the affected 2013 returns with "due dispatch," given inter alia problems with the applicant's definition of the class and deficiencies in her litigation plan (re fees and notifications).
Even if the action had been certified, there presumably would be minimal damages if CRA ultimately denies the credits (e.g., based on the tax shelters, such as that for the applicant, using leveraged gifts – see Maréchaux).
Neal Armstrong. Summary of Rae v. MNR, 2015 FC 707, under Federal Court Rules, Rule 334.16(1).
The Automotive Properties REIT IPO will use a conventional exchangeable unit structure
The Dilawri Group will transfer under s. 97(2) a portion of their Canadian automobile dealership properties (subject to leases back to them) to a subsidiary LP of the proposed Automotive Properties REIT for Notes and Class C LP units (to be redeemed for cash shortly thereafter) and for Class B exchangeable LP units (which will be treated as debt for accounting purposes). The public then will subscribe for conventional (s. 108(2)(a)) REIT units and the REIT will subscribe for (conventional) Class A LP units of the LP. Through their Class B LP Units (and corresponding special voting units of the REIT) the Dilawri Group initially will have a 60% interest in the REIT.
Their Class B LP unit exchange rights will be buttressed by a conventional exchange agreement between them, the Partnership and the REIT. Initial nervousness about the potential scope of the derivative forward agreement rules may have prompted the avoidance in prior transactions of direct rights of the exchangeable unit holders against the applicable REIT (see 2014 CTF Roundtable, Q. 1(c)).
Neal Armstrong. Summary of Automotive Properties REIT preliminary prospectus under Offerings – REIT and LP Offerings – Domestic REITs.
CRA finds that s. 15(1.4)(c) can be applied to extend the scope of s. 246(1) under the Massicotte indirect benefit doctrine
S. 15(1.4)(c) assimilates a benefit conferred on an individual related to a shareholder to s. 15 benefits conferred on that shareholder. In a situation where there was personal use of a corporate aircraft by the individual shareholder (Mr. A) of the "grandfather" (indirect parent) of the corporate owner of the aircraft and by Mr. A’s father, CRA (surprisingly) indicated that there would be no taxable benefit from such use by the father for the years under review before the effective date of s. 15(1.4)(c) – but thereafter, the value of the benefits enjoyed by the father were taxable to his son (Mr. A). CRA’s analysis was that, under Massicotte (a.k.a. Pub Création), the conferral of a benefit by a corporation on the shareholder of its parent (or, in this case, of the grandparent) constitutes an indirect benefit to the shareholder of the grandparent which is a taxable benefit to him (Mr. A) under s. 246(1), given that a benefit conferred on him directly by the grandparent corporation would have been taxable to him under s. 15(1). S. 15(1.4)(c) would then apply to add the benefit conferred on Mr. A’s father to the benefits which were taxable to Mr. A under s. 246(1).
As for the valuation of those benefits, CRA concluded after reviewing four Court of Appeal decisions (Youngman, Fingold, Schroter and Anthony) that the valuation of the benefits should be based on their fair market value (corresponding "to the price which the shareholder would have to pay, in comparable circumstances, to obtain the same benefit from a corporation of which he was not a shareholder") rather than their cost – although, here, the denied operating expenses and CCA of the corporate owner "could be utilized in establishing the value of the benefit conferred on Mr. A and Mr. B to the extent that it could be demonstrated that this value approximated the FMV of the benefit received."
Neal Armstrong. Summary of 3 March 2015 Memo 2014-0527841I7 F under s. 246(1) and s. 13(7)(c).
Alamos Gold, in form, will be the Targer in a merger-of-equals between it and AuRico Gold
It is proposed that AuRico will acquire all the shares of Alamos in consideration for AuRico common shares and nominal cash (so that a s. 85 election is required for rollover treatment), and then amalgamate with Alamos. Former AuRico and Alamos Shareholders are anticipated to own 50.1% and 49.9% of Amalco, respectively. 95.1% of the shares of a newly-incorporated subsidiary, namely, AuRico Metals, holding a B.C. development project, cash and royalty interests, will be spun-off to all the Amalco shareholders under a s. 86 reorg involving an exchange of Amalco common shares for Amalco Class A shares (with identical substantive attributes) and common shares of AuRico Metals. The AuRico Metals distribution will be treated as a dividend for Code purposes based on current or accumulated earnings and profits of Amalco; and the merger is intended to qualify as a Code s. 368(a) reorg for both AuRico and Alamos shareholders – except that those who acquired their Alamos shares before 2006 (when Alamos ceased to be a PFIC) will be subject to the PFIC rules.
It is not clear what role the relative paid-up capital of the Alamos and AuRico shares or the acquisition-of-control rules played in the decision to have Alamos, in form, be the Target. An acquisition of control of AuRico (which likely has significant Canadian resource pools) by Alamos under ITA s. 256(7)(c) will be avoided by having the AuRico Metals spin-off occur after the merger. The U.S. treatment of the spin-of likely would not be different if it had occurred before the merger nor would such ordering likely affect the qualification of the merger as a s. 368(a) reorg.
Neal Armstrong and Abe Leitner. Summary of AuRico/Alamos Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.
Tan – Tax Court of Canada states that not obtaining a GST number before claiming an input tax credit will result in denial of the ITC
Masse DJ stated, following Systematix and Comtronic, that if a registrant has not obtained an invoice specifying the prescribed information, including the GST/HST registration number of the supplier, before an input tax credit is claimed, the ITC will be denied. Although where, as here, the registrant still had not gotten the registration number by the trial date, denial of the ITC was to be expected, this would represent a harsh approach in more sympathetic circumstances, e.g., where absence of a registration number on the invoice was identified after claiming the ITC – with documentation of the missing particular then obtained before a CRA audit.
Neal Armstrong. Summary of Tan v. The Queen, 2015 TCC 121 under ETA – s. 169(4).
Zhao – Tax Court of Canada finds that the meaning of a definition is informed by words in the defined term
In Wunderlich, Webb J (while still in the Tax Court) found that the meaning of a defined term is informed only by the words in the definition rather than by the words in the defined term so that, for example, a "small business corporation" is not necessarily "small" – or, in the case before him, a "new work location" under the employee moving expense rules does not have to be a different location than the previous work site, as there is no requirement to that effect in the definition itself.
Masse DJ disagreed, indicating that if the legislative drafter used "new" in the defined term, there must have been a new work location in mind. (By the way, no one argued that "new" modifies "work" rather than "location" so that the taxpayer satisfied the defined term (as well as the definition) because he moved due to his "new" (more onerous) work duties.)
Neal Armstrong. Summary of Zhao v. The Queen, 2015 TCC 124 under s. 248(1) – eligible relocation.
CRA softens its stance on what constitutes acting in concert
CRA has amended its Folio on the non-arm’s length concept to indicate that "the fact that two or more parties act in a highly interdependent manner (in respect of a transaction of mutual interest) can be an indication of the fact that the parties are acting in concert," whereas the previous version stated that "when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest), then it can be assumed that the parties are acting in concert" (emphasis added). This is responsive to a submission in the CBA/CICA Joint Committee Submission on Income Tax Folio S1-F5-C1, 16 June 2014 that the previous statement did not accord with the jurisprudence (see also Mah and Meredith).
Neal Armstrong. Summary of S1-F5-C1 under s. 251(1)(c).
Reversing its published position, CRA now permits a s. 110(1)(d) deduction for a stock option benefit arising on death
Where a s. 7 benefit arises otherwise than from acquisition of the underlying shares, ss. 110(1.1) and 110(1)(d)(i) require that the employer make and file an election to agree to not take any deduction for the benefit amount in order for the employee to be permitted to claim the (1/2) s. 110(1)(d) deduction.
This raises an issue where the benefit arose on death under s. 7(1)(e). Although s. 110(1.1) does not go so far as to require the dead employee to sign the election, it does require the employee to receive a copy of the election and file it with his or her return.
Reversing 2011-0423441E5 F, CRA now states that "on an administrative basis, …an election [may] be made pursuant to subsection 110(1.1)…in circumstances where paragraph 7(1)(e)…applies." CRA dos not explicitly state that a copy of the election should be included in the terminal return, but this would be prudent.
Neal Armstrong. Summary of 4 May 2015 T.I. 2013-0484181E5 under s. 110(1.1).