News of Note
Brookfield Infrastructure Partners L.P. is issuing preferred units with distributions thereon to be 50% tax-deferred
Email this ContentBrookfield 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).
CRA makes some additions in its new Folio on interest deductibility
Changes going from IT-533 to the new interest-deductibility Folio include:
- a reference to Midwest (respecting interest not having been deductible in any year due to the "in respect of" requirement) has been dropped
- an acknowledgement that Ludco indicates that an ancillary purpose to produce gross income is sufficient for deductibility, while CRA at the same time insists on a positive spread in the context of loss shifts
- an addition of a statement of the long-standing policy that interest on borrowings to fund PUC distributions is non-deductible unless the proceeds are used for an eligible purpose
- an expanded discussion of interest-free loans including a nostalgic reference to interest being denied in a cross-border contribution of capital in Mark Resources
- the section on loss shifts merely states that "the transactions that are undertaken must not be blatantly artificial," and does not require more explicitly that the amounts used are not in excess of what could be borrowed from the bank (see also 2014-0525441R3)
- an additional statement that "where accrued interest is added to the outstanding principal amount of an existing loan resulting in a new obligation or novation, an interest payment will not be considered to have been made."
Neal Armstrong. Summaries of S3-F6-C1: "Interest Deductibility" under s. 20(1)(c), s. 9 – exempt receipts, s. 16(1), s. 248(1) -10/8 policy, s. 18(1)(b) – capital expenditure v. expense – financing expenses, s. 67.1(1).
CRA finds that a taxpayer's failure to file returns was a “misrepresentation” entitling CRA to open up a statute-barred year
A taxpayer failed to file a tax return notwithstanding a s. 150(2) demand to do so, CRA assessed under s. 152(7) without the return and then, more than three years later, discovered some income which it had missed. In finding that it was not now statute-barred from assessing this additional income, CRA stated that by virtue of not filing the return "the taxpayer has made a misrepresentation by virtue of wilful default."
This accords with common sense, but not with the meaning of "misrepresentation:" the taxpayer quite clearly had not made any representation.
Neal Armstrong. Summary of 4 December 2014 Memo 2014-0526451I7 F under s. 152(4)(a)(i).
CRA finds that warrants distributed under s. 84(2) have a cost equal to their (estimated) FMV
A Canadian public corporation, which holds some foreign exploration companies indirectly through a Canadian holdco which it mostly has capitalized with debt, will convert a portion of that debt into common shares and common share purchase warrants, and then make a paid-up capital distribution of the shares and warrants to its shareholders under s. 84(2) – but with only the distributed common shares being subsequently listed.
Although no section states this, CRA considers that common shares received on a s. 84(2) distribution have a cost equal to their fair market value at that time. Not surprisingly, CRA extended this position to the cost of the warrants. More surprisingly, the ruling letter boldly states what will be the approximate respective FMVs of the distributed shares and warrants.
Neal Armstrong. Summary of 2014 Ruling 2014-0537161R3 under s. 84(2).
CRA confirms a full step-up of properties distributed in satisfaction of an estate’s capital interest in an inter vivos personal trust
S. 107.4(4) deems an indefeasibly-vested capital interest in an inter vivos personal trust to have a fair market value equal to a proportionate share of the trust’s net asset value. This means that where such an interest passes on death (thereby resulting in a deemed FMV cost to the estate of such interest as so computed), the estate upon receiving a distribution of trust property in satisfaction of its capital interest generally can step up the cost of such distributed property to an amount equal to such FMV.
Neal Armstrong. Summaries of 12 December 2014 T.I. 2013-0511391E5 under s. 107(2) and s. 70(5).
CRA position implies that dissolving a partnership can have the effect of postponing indefinitely the recognition of a suspended capital loss
The postamble to s. 40(3.4) provides that, for purposes of the suspended loss release events listed in s. 40(3.4)(b), a dissolved partnership is deemed to continue to exist and its partners to continue to be partners until immediately before the occurrence of such a release event. CRA considers that this means that if a capital loss, which was suspended on the disposition of a partnership interest to an affiliated corporation, will continue to be suspended after the dissolution in a subsequent year of the partnership and thereafter until the transferor and transferee cease to be affiliated, or there is an acquisition of control of the transferor – or perhaps some more obscure release event occurs.
Although, at first glance, this looks reasonable, it seems to imply that the loss will remain suspended even if the former partnership business is sold to a third party.
Neal Armstrong. Summary of 27 October 2014 Memo 2014-0534981I7 F under s. 40(3.4).