News of Note
CRA rules on a registered charity carrying on a land development business through a trust
Email this ContentA registered charity such as a charitable organization or public foundation is prohibited from carrying on a business (other than a "related business"). CRA ruled that a charitable organization holding vacant lands could indirectly develop the lands as serviced lots suitable for sale to a builder by selling the lands to an LP in which it indirectly participated as limited partner through a newly-formed discretionary trust (with the other named beneficiary being an allied charity) – so that these transactions would not by themselves result in the charitable organization being considered to carry on a business other than a related business. As the trust presumably would distribute its share of the LP profits to the charitable organization, the effect is that the charitable organization can profit on a tax exempt basis from what likely is an unrelated business. CRA also gave a GAAR ruling.
Essentially no reasons were given and no reference was made to s. 108(5), which deems trust distributions to be property income rather than income from a business. At some point, someone may ask whether this means that a charity can carry on any business it wants on an exempt basis through a trust!
Neal Armstrong. Summary of 2014 Ruling 2014-0529291R3 F under s. 149.1(2)(a).
The 2013 amendment to s. 42 prevents damages payments made after the filing due date for sales of small business corporation shares to qualify as a business investment loss
Where a taxpayer disposed of small business corporation shares and in a subsequent taxation year paid damages for breach of a covenant in the sale agreement, s. 42(b) formerly deemed the damages payment to be a capital loss from the disposition of the shares, so that it could qualify as a business investment loss. Effective for taxation years ending after 4 November 2010, s. 42 was amended in 2013 so that the payment (if made after the filing due date for the taxation year of the sale) was deemed to be a capital loss from the disposition of property in the abstract rather than from the specific shares, so that such amount could no longer qualify as a BIL.
Neal Armstrong. Summary of 2 October 2014 2013-0513281E5 F under s. 42.
Income Tax Severed Letters 30 December 2014
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The ordinary Wednesday release schedule will resume next week.
Asset sale by Anderson Energy of non-core gas assets is structured to also transfer $222M of tax losses
Although Anderson Energy is proposing to sell some non-core shallow gas assets to Freehold Royalties for $35M, Freehold also will be transferred $222M in non-capital losses and undepreciated capital cost. This will be accomplished by:
- The Anderson shareholders transferring all their shares to a new holding company (New Anderson)
- Anderson transferring all its core assets to New Anderson effectively as a stated capital reduction (or, to be more precise, selling those assets for New Anderson shares utilizing a s. 85 election, and then transferring the New Anderson shares to New Anderson for cancellation as a stated capital distribution)
- New Anderson selling the Anderson shares to Freehold for $35M in cash (subject to adjustment based on the level of tax attributes)
The Circular states: "By virtue of New Anderson having acquired approximately 92% of Anderson’s Canadian resource property…it is anticipated that the successor tax election [under s. 66.7(7)(e)] will allow New Anderson to also acquire the undeducted resource tax pools of Anderson, on a ‘successored’ basis… ."
Neal Armstrong. Summary of Anderson Energy Circular under Spin-Offs & Distributions – Taxable Spin-offs.
BCE proposed acquisition of GLENTEL does not include a de minimis cash consideration component
In the proposed BCE acquisition of GLENTEL for ½ of a BCE share or cash of $26.50, per GLENTEL share at the GLENTEL shareholder’s option (but with the overall consideration being fixed on essentially a 50-50 basis), a GLENTEL shareholder potentially could receive only share consideration, so that the s. 85.1 rollover would be available. This contrasts with other offerings (e.g., First Quantum/Lumina and Loblaw/Shoppers Drug Mart) where a minimum (and somewhat nominal) cash consideration was specified, so that all target shareholders wishing rollover treatment would be required to make a s. 85 election.
In addition to posting a "Tax Instruction Letter" on its website, BCE will provide the letter to a duly requesting shareholder by email.
Neal Armstrong. Summary of GLENTEL Circular under Mergers & Acquisitions – Mergers – Shares for Shares or Cash.
RRSP day trading generally is exempt
Gains from day trading qualified investments in an RRSP are exempt.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q.2, 2014-0538221C6 F under s. 146(4).
CRA considers that a note issuance by a personal trust does not qualify as a trust property distribution for s. 107(2) rollout purposes
Although a capital beneficiary of a family trust generally will have a nil cost for her interest, a distribution of her share of trust property generally will not generate a capital gain because she will be deemed to have an adjusted cost base for her interest equal to the cost amount of the "property of the trust ... distributed by the trust to the taxpayer in satisfaction of ... [her] capital interest."
What if the trust instead issues a note to her in satisfaction of her capital interest? CRA considers that "the issuance of a note does not constitute the distribution of property of a trust to a beneficiary for [these] purposes," so that she would realize a capital gain equal to the note amount – and, by the way, the interest on the note would be non-deductible to the trust.
Neal Armstrong. Summaries of 10 October 2014 APFF Roundtable, Q.9, 2014-0538261C6 F under s. 108(1) – cost amount and s. 20(1)(c).
Fairmont Hotels – Ontario Superior Court follows Juliar rather than Graymar in finding that a continuing (non-specific) intention to maintain a tax neutral structure was a sufficient basis for rectification
As part of a larger intercompany "reciprocal loan arrangement," a Canadian Fairmont company (FHIW Canada) held U.S. dollar denominated prefs of a U.S. subsidiary which had been financed by matching U.S. dollar denominated prefs in its capital. As a result of a subsequent indirect acquisition of control, there was a s. 111(4)(d) write-down in FHIW Canada’s hands of the prefs held by it reflecting the depreciation of the U.S. dollar, without any ability to eliminate the corresponding accrued FX gain on the prefs in its capital. The fact that FHIW Canada was no longer hedged from a Canadian tax perspective was temporarily forgotten when this structure was unwound a year later through inter alia a redemption of the two matching sets of prefs, so that FHIW Canada realized a s. 39(2) gain on redeeming the prefs in its capital.
In rectifying this redemption to treat it instead as a loan by FHIW Canada to its parent, Newbold J found that there had been a continuing intention for the reciprocal loan arrangement to be tax neutral, and that "the purpose of the…unwind of the loans was not to redeem the preference shares of FHIW Canada…but to unwind the loans on a tax free basis." As he was bound by Juliar, he did not have the "luxury" of following Graymar and, in any event, he questioned that case. Accordingly, it did not matter that the particular rectification solution adopted (using a loan) was not contemplated at the time of the unwind.
Neal Armstrong. Summary of Fairmont Hotels Inc. v. A.G. Canada, 2014 ONSC 7302 under General Concepts – Rectification and Rescission.
Trust residence can be structured to be in a different jurisdiction than the ordinary location of the trustees
The appropriate application of the corporate residence test of central management and control to ascertaining trust residence is to look to the jurisdiction where the decision making over the corpus is exercised. This indicates that it is possible for a trust to be resident in a different jurisdiction than the ordinary location of its trustees or other decision makers – analogous, say, to a corporation with mostly non-Caymans directors being resident in the Caymans because that is where the high level decisions are made in board meetings.
Neal Armstrong. Summary of H. Michael Dolson, "Trust Residence After Garron: Provincial Considerations," Canadian Tax Journal, (2014) 62:3, 671-99 under Reg. 2601(1).
The application of the fresh start rule to arm’s length FA acquisitions often will supplant the carve-out rule
2014-0536581I7 indicates that the fresh start rule may often extend to arm’s length acquisitions – for example when there is such an acquisition of a foreign affiliate (FA) which is carrying on a business which, post-acquisition, is considered to be an investment business – and noted that "the threshold amount of activity that is required to cause any corporation (including a FA) to be considered to be carrying on business is extremely low." Consequently, in many instances the fresh start rule in s. 95(2)(k.1) will supplant the carve-out rule in s. 95(2)(f.1).
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "Fresh-Start FA Rules," Canadian Tax Highlights, Vol. 22, No. 12, December 2014, p. 7 under s. 95(2)(k).