News of Note
Probe will spin-off exploration assets in a s. 84(2) and (4.1)(a) PUC distribution, and be acquired by Goldcorp for shares and nominal cash in a forward triangular merger
Email this ContentGoldcorp covets Probe's Borden gold project. Probe first will distribute its common shares of a newly-formed Explorationco to its shareholders as a paid-up capital distribution (rather than using the more typical s. 86 reorg), with this step being garnished with wording taken from both the ss. 84(2) and 84(4.1)(a) safe harbours. All the Probe common shares will then be exchanged for Goldcorp common shares (together with nominal cash so as to require a joint s. 85(1) election to achieve Canadian rollover treatment). Goldcorp will drop its Probe shares into a wholly-owned subsidiary (Subco). Subco will be the survivor of its amalgamation with Probe (see 2006-0178571R3). The above and other steps are deemed under the Plan of Arrangement to occur at one minute intervals, including the filing of an election of Probe with CRA to cease to be a public corporation before its amalgamation with Subco.
The share exchange and survivor amalgamation are intended to qualify as a (Code s. 368(a)(2)(D)) forward triangular merger (which may have been preferred given the distribution of the Explorationco and the more stringent boot rules applicable to reverse triangular mergers.) Probe and Goldcorp are believed to be a PFIC and non-PFIC, respectively, so that US shareholders of Probe who do not make a QEF or mark-to-market election would not receive rollover treatment under a proposed retroactive Regulation - and the disclosure indicates that they should assume that Goldcorp will not provide them with the required information to validly access a QEF election. Although, unlike the disclosure for the Sulliden/Rio Alto merger, no statement is made that the transaction should qualify for nonrecognition if the Regulation is not finalized, it nonetheless might be anticipated that at least some U.S. shareholders will take the position that the gain recognition rule in the Code is not self implementing and, in the absence of final regulations, no gain recognition is required.
Neal Armstrong and Abe Leitner. Summary of Probe Mines Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.
CRA considers that substantial machinery generally must be used in a province for at least 30 days to be a provincial PE
In the course of an HST ruling, which turned on whether a corporation had a "permanent establishment" in a participating province as defined in ITA Reg. 400(2), CRA indicated that the corporation would be considered to have a "fixed place of business" even if the activities carried on in an "ascertained space in which there is some presence or routine over which [it] has some degree of control and in which some undertaking or operations of [it] occur. …[do]… not… exist for a long time…for instance, a temporary field office." CRA further stated that the substantial machinery test in Reg. 400(2)(e) will be satisfied if the corporation uses the "equipment in a province either for 30 continuous days or for 90 cumulative days in a 12-month period."
Neal Armstrong. Summaries of 12 June 2014 Ruling 133588r under ITA Reg. 400(2) and ETA, s. 259(3).
Feedlot Health – Tax Court of Canada finds that SR&ED proxy expenses can include costs of a third party which is not engaged in SR&ED
Where a taxpayer has elected to use the proxy (rather than traditional) method to compute additions to its pool of deductible SR&ED expenditures, the base expenditures claimable by it include (under s. 37(8)(a)(B)(II)) "an expenditure of a current nature in respect of the prosecution of scientific research and experimental development in Canada directly undertaken on behalf of the taxpayer." Woods J found that, in light of the broad meaning of "in respect of," this includes amounts paid to a third party, who is not engaged in SR&ED, for materials used in SR&ED that is being conducted by a third party for the taxpayer.
Accordingly, the taxpayer was allowed to recognize, for deduction and ITC purposes, the sums paid by it to a rancher (also a major shareholder) for the rancher’s costs of feeding cattle at feedlot operators, who also were being paid something extra by the taxpayer to follow an SR&ED testing protocol on those cattle, before they were slaughtered. This was so even though economically the amounts paid were mostly for beef production rather than the testing.
Neal Armstrong. Summary of Feedlot Health Management Services Ltd. v. The Queen, 2015 TCC 32, under s. 37(8)(a)(ii)(B).
French – Tax Court of Canada confirms that it is intended for transactions to produce potentially different federal tax results in different provinces
S. 8.1 of the Interpretation Act, which indicates that provisions of the Act (in the absence of contrary direction) should be applied in accordance with the applicable provincial property law, implies that essentially the same transactions can produce different results in different provinces. Accordingly, C. Miller J found that an argument that a gift made in a common law province should be treated in the same manner as if made in Quebec, in order to conform with a supposed "uniformity" principle, was "hopeless."
Neal Armstrong. Summary of French v. The Queen, 2015 TCC 35, under Interpretation Act, s. 8.1.
CRA is showing a continued disinterest in the GST/HST GAAR rule?
The new CRA Memorandum on the GST/HST general anti-avoidance rule is a bland and superficial paraphrase which is devoid of any insight that might have been garnered from a review of the extensive jurisprudence on the very similar income tax provision. Its perfunctory character may be consistent with a continued neglect of GAAR from the GST/HST solitude (see Murray). There have been essentially no GST GAAR cases (cf Michelin).
Neal Armstrong. Summary of GST/HST Memorandum 16-4 "Anti-avoidance Rules" under ITA s. 245(4).
George Weston Ltd. – Tax Court of Canada finds that a cross-currency swap was a hedge notwithstanding no intention to sell underlying indirect U.S. asset
As a result of indirect U.S. acquisitions financed with Canadian-dollar debt, the creditworthiness (and stock price) of GWL (a Canadian public company) became susceptible to any substantial depreciation in the U.S. dollar. Accordingly, it entered into cross-currency swaps based on the total net value of its indirect U.S. investments at that time. Two years later, when its leverage was back down to a more comfortable level, it closed out its swaps at a gain of Cdn.$317 million.
This was a capital gain. Lamarre ACJ found:
- if, as here, "it is found that the derivative was used to hedge a capital investment, any gain derived from the derivative will be on capital account" (emphasis added); and
- the CRA position (see 2013-0481691E5, 2012-0465561I7 and 2011-0418541I7) requiring that a mooted hedge relate to a directly held asset (or liability) and "which denies capital treatment … if there is no sale or proposed sale of the underlying item being hedged … has no legal basis."
She also accepted evidence that cross-currency swaps, unlike futures and options, are unsuited to FX speculation due to their high initial transaction costs and lower liquidity, which may suggest that they presumptively are on capital account.
Neal Armstrong. Summaries of George Weston Ltd. v. The Queen, 2015 TCC 42, under s. 9 – capital gain v. profit – foreign exchange and General Concepts – Evidence.
CRA indicates that use of a new holding company can enable a related-person spin-off
If two related and one unrelated individual spin-off real estate held in their Opco to a newly-formed sister company (Realtyco) also equally owned by them, the s. 55(3)(a) safe harbor will not apply to the deemed dividends arising on the cross-redemptions occurring as part of the spin-off mechanics.
On the other hand, if they first transfer Opco into a new "Holdco," with essentially the same spin-off mechanics now occurring beneath the benevolent umbrella of Holdco, the s. 55(3)(a) exception will now be available, provided a few precautions are taken. This would still accomplish an objective of insulating the real estate from creditors of the Opco operations.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 16, 2014-0538031C6 F under s. 55(3)(a).
CRA applies its single property doctrine to tracking LP units
CRA’s position, that a partner holding different classes of partnership units has only one property for ITA purposes, obtains even where the units in question are tracking units which participate in the results of respective subsidiary LPs held by the top-tier partnership in which that partner is invested – so that it will have a single blended ACB for its units.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 22, 2014-0538161C6 under s. 53(1)(e)(i).
CRA accepts that real estate provided by a franchisor’s subsidiary qualified for s. 167 election purposes as provided “under” the agreement between franchisor and franchisee
Although CRA would not consider an ETA s. 167 election to be available when a franchisor sets up a new franchised restaurant unless the restaurant premises are transferred to the franchisee "under" the agreement for the supply of the franchise, CRA considers this requirement to be satisfied if the agreement provides that the site will be leased to the franchisee by a real estate subsidiary of the franchisor.
Neal Armstrong. Summary of 25 July 2014 Interpretation 158278 under ETA, s. 167.
Income Tax Severed Letters 18 February 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.