News of Note
CRA agrees to certify the status of a partnership as a Canadian partnership at the request of an authorized representative.
Email this ContentCRA has now agreed to be somewhat more accommodating of requests for a certificate of residency of a Canadian partnership (e.g., from the India tax authorities), stating that where a representative is authorized to act on behalf of all the partners, CRA, on request of that representative:
will certify the residency of all the partners of the partnership, and certify that the partnership is a "Canadian partnership."
It would not hurt to add a clause, to the boilerplate for an LP agreement, that the GP or its tax advisor is thereby authorized to seek a certificate of residency on behalf of all the partners.
Neal Armstrong. Summary of 26 January 2015 T.I. 2014-0547501E5 under s. 2(1).
The Agnico choice of an issuance date FX translation date may be inconsistent with the Mosely v. Koffyfontein finding that the consideration paid for shares on a debenture conversion is to be determined at that conversion time
Agnico convertible debentures, which had been issued for U.S.$1,000 per debenture, were converted into common shares at a time that the U.S. dollar had depreciated in value, thereby in the view of CRA giving rise to a s. 39(2) FX gain. However, Woods J found that the relevant date for translating the amount paid by Agnico on settling the debentures should be viewed as the date when the "true consideration" for the shares (with which Agnico repaid the debentures) had been received, which she found was the date when the U.S.1,000 was received on the prior issuance of each debenture.
Chris Van Loan and Peter Lee suggest that Mosely v. Koffyfontein, [1904] 2 Ch. 108] (CA) arguably casts doubt on the correctness of Agnico given the finding there that the consideration paid for shares on the conversion of debentures usually is to be determined at the time the obligation to repay is extinguished, and not when the debentures are issued.
Neal Armstrong. Summary of Chris Van Loan and Peter Lee, "Agnico Eagle Mines Limited v. The Queen," International Tax, Wolters Kluwer CCH, No. 80, February 2015, p.1 under s. 261(2).
Income Tax Severed Letters 18 March 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Inbound debt into Canada generally should not be recharacterized as equity under the transfer-pricing rule given the annual application of the thin cap rule
CRA and the OECD acknowledge that recharacterizing a transaction under the transfer-pricing rules is an exceptional step which should only be taken in limited circumstances. On the other hand, a non-resident parent’s capitalization or recapitalization of it Canadian sub "is not something that could (ever) be undertaken by arm's-length parties," so that this un-exceptional transaction would seemingly lend itself to frequent recharacterization through treating loans to Canadian subs as equity.
The likely answer to this dilemma is that the cross-border interest is annually tested under the thin cap rule, so that there should be "little scope" for the recharacterization rule in s. 247(2)(d) to operate.
Neal Armstrong. Summary of Derek G. Alty and Brian M. Studniberg, "The Corporate Capital Structure: Thin Capitalization and the ‘Recharacterization’ Rules in Paragraphs 247(2)(b) and (d)," Canadian Tax Journal, (2014) 62:4, 1159-1202 under s. 247(2).
U.S. shareholders of Rio Alto cannot access a Treaty to exempt their sale of Rio Alto shares for Tahoe shares from Peruvian gains tax
Tahoe is proposing to acquire all the Rio Alto common shares under a Plan of Arrangement in exchange for Tahoe common shares (together with nominal cash so as to require a joint s. 85(1) election to achieve Canadian rollover treatment), with Tahoe then dropping its Rio Alto shares into a wholly-owned subsidiary and causing their amalgamation in a conventional amalgamation. The share exchange, drop-down and amalgamation are intended to qualify as a Code s. 368(a) reorganization – so that tax deferral (except re the nominal cash) generally will be available for U.S. shareholders who acquired their Rio Alto shares after May 2011, as Rio Alto is believed not to have been a PFIC since then.
Rio Alto’s assets are mostly Peruvian mining/development subsidiaries. As the U.S. does not have a Treaty with Peru, U.S. shareholders of Rio Alto (unlike Canadian-resident shareholders) will not be exempt from Peruvian tax arising on the exchange of their shares under the Peruvian equivalent of the taxable Canadian property/FIRPTA rules, and generally will not be entitled to a U.S. foreign tax credit, as any gain on their Rio Alto shares would be treated as U.S.-source income.
There is no discussion of how Peru might collect this tax.
Neal Armstrong. Summary of Rio Alto Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.
Brookfield Infrastructure Partners L.P. is issuing preferred units with distributions thereon to be 50% tax-deferred
Brookfield Infrastructure Partners L.P., which is a TSX- and NYSE-listed Bermuda limited partnership, is issuing preferred units (to be TSX-listed) with attributes similar to the preferred units that have been issued by REITS, such as Artis. These prefs likely will be allocated the same percentage of income for ITA purposes (expected to average around 50% for the next five years) as on the "common" units. Where a pref holder also holds common units, the LP considers it to be reasonable for the holder’s ACB to be allocated between its prefs and commons as if they were separate types of property rather than identical property (see also 2014-0538161C6).
The LP's general partner is intended to have Bermuda central management and control so that the LP can avoid SIFT taxation. Part XIII tax withheld on dividends paid by indirect Canadian subsidiaries of the LP will take into account the residency status (i.e., Canada, Treaty- and non-Treaty countries) of the LP partners (which is not a trivial undertaking for a publicly traded LP).
For U.S. purposes, the LP does not expect to withhold US taxes from the pref distributions on the basis inter alia that they are guaranteed payments for the use of capital, rather than the holders being subject to the more usual partnership taxation rules.
Neal Armstrong. Summary of Brookfield Infrastructure Partners L.P. prospectus for offering of preferred units under Offerings - REIT and LP Offerings - Preferred Unit Offerings - Limited Partnerships.
S. 256(6) does not protect a company’s CCPC status where its shares are pledged to a pubco to secure an indemnity, not debt
S. 256(6) typically will deem a pledge of shares of a mooted Canadian-controlled private corporation to a public corporation, such as a bank, to secure indebtedness (which thereby entails a contingent right, described in s. 251(5)(b), of such pubco to acquire the pledged shares on default) not to entail control of the CCPC by the pubco. However, CRA notes that this provision does not work if the pledge instead secures an indemnity right of the pubco (which would not come within the classic definitions of "indebtedness" or "debt.")
Summaries of 4 February 2015 T.I. 2015-0565741E5 under s. 256(6) and s. 251(5)(b).
CRA finds that “proceeds” of property for s. 55(3)(a)(i)(B) purposes were the deemed s. 69 “proceeds of disposition”
The carve-out in s. 55(3)(a)(i)(B) - from what otherwise would be a disposition of property to an unrelated person which was tainted under s. 55(3)(a)(i) – rather curiously refers to a disposition of the property for "proceeds" that are not less than its fair market value, rather than using the defined phrase "proceeds of disposition." CRA nonetheless considers that where the property is disposed of for actual proceeds of nil, but is deemed by s. 69(1)(b)(ii) to be disposed of for FMV proceeds of disposition (because it is a gift), the s. 55(3)(a)(i)(B) carve-out will be satisfied.
Neal Armstrong. Summary of 11 February 2015 T.I. 2014-0557251E5 F under s. 55(3)(a).
Income Tax Severed Letters 11 March 2015
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
TDL Group Co. – “indirect use” of borrowed funds is used as a sword by the Tax Court of Canada
The Canadian taxpayer ("TDL") used money, which it had indirectly borrowed from its U.S. parent ("Wendy’s"), to subscribe for common shares of its wholly-owned U.S. subsidiary ("Tim's U.S.") which, in turn, lent the money back to Wendy’s – initially on a non-interest-bearing basis until it was changed to interest-bearing eight months later. In denying an interest deduction to TDL on its borrowing during the eight-month period, Pizzitelli J found that TDL did not have "any reasonable expectation of earning non-exempt income of any kind" on its common share investment given inter alia Tim's U.S.’s history of losses, and its policy of applying cash flow to capital expenditures rather than dividends – plus a 10 year projection showing no dividends.
Pizzitelli J might have stopped there, but he went on to indicate that "the sole purpose of the borrowed funds [was] to facilitate an interest free loan to Wendy’s," i.e., he looked at the indirect use of the borrowed funds, namely, the direct use of them by Tim's U.S. To boot, he also indicated that borrowing to generate capital gains potentially could satisfy the income-producing purpose test under s. 20(1)(c), although that was no such capital gains purpose here.
Neal Armstrong. Summary of TDL Group Co. v. The Queen, 2015 TCC 60, under s. 20(1)(c).