News of Note
Finance provides comfort that additional persons becoming affiliated with an “actual” majority interest beneficiary will not trigger a loss restriction event
Email this ContentIn a comfort letter released today, Finance is recommending an amendment that would add to the current definition of a majority-interest beneficiary, in the loss restriction event rules, an additional stipulation that in order for a person to be a majority-interest beneficiary it must also be a beneficiary, as broadly defined in s. 248(25), i.e. someone becoming a majority-interest beneficiary will not trigger a loss restriction event if that person does not also have an interest in the trust (albeit, as so broadly defined). See 2014-0534841C6 F.
Among other recommendations, the new safe harbour in s. 251.2(3)(f) for what otherwise would be a loss restriction event for an investment fund would also be available on a unit redemption.
Neal Armstrong. Summary of 23 December 2014 Finance Comfort Letter.
Income Tax Severed Letters 23 December 2014
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Next week's release will be on 30 December 2014. Wednesday schedule will resume on 7 January 2015.
Holding resource properties in a 2nd-tier partnership on a corporate acquisition of control should not deny successored expense deductions from that partnership’s allocated income
In Devon, Hogan J concluded that where, following an acquisition of control ("AOC") of a corporation, resource properties held by it in a directly-held partnership were dropped down into a 2nd-tier partnership, the corporation could continue to claim successored resource deductions in respect of income from those resource properties which was allocated to it.
The reasoning in the case also suggests that the corporation should be entitled to such deductions where the partnership instead is wound up following the AOC, or if at the time of the AOC there was a two-tier partnership structure with the bottom partnership owning all the resource properties. The latter proposition may turn on the proposition that a corporate member of an upper tier partnership also is a member of a lower tier partnership (Major v. Brodie cf. Haughey).
Neal Armstrong. Summary of Brian R. Carr, "Devon Canada Corporation v. The Queen," Resource Sector Taxation (Federated Press), Vol. IX, No. 4, 2014, p. 677 under s. 66.7(16)(j).
Structuring of Donnycreek/Contact amalgamation may produce deemed dividends to dissenters
Although Contact Energy is acquiring Donnycreek Energy in the sense that the transaction is occurring at its initiative, with Donnycreek shareholders receiving a 56% premium for their shares and management of the merged company being Contact executives, the form of the acquisition is an amalgamation (occurring under a Plan of Arrangement) in which the Donnycreek shareholders will receive a majority (56.4%) of the shares of Amalco (a.k.a. Kicking Horse Energy Inc.).
In S4-F7-C1, CRA states: "subsection 84(3) will not otherwise apply to deem a shareholder of a predecessor corporation to have received a dividend where the shareholder exercises its statutory dissent rights in respect of the amalgamation." However here, the Plan of Arrangement specifically deems the dissenting shareholders of the predecessors (Donnycreek and Contact) to have transferred their shares to the predecessors rather than to Amalco. The tax disclosure indicates that they may receive deemed dividend treatment on the amalgamation.
Neal Armstrong. Summary of Circular of Donnycreek Energy and Contact Explorations under Mergers & Acquisitions – Amalgamations – Non-Triangular Amalgamations.
Dixie Energy Trust asset sale and winding-up is structured to preclude any push-out to the unitholders of gain
Dixie Energy Trust, which is a listed Alberta unit trust holding U.S. oil and gas assets through U.S. subsidiaries, will close a sale of all its assets on December 29, 2014 and distribute all the net cash proceeds in the following year. It appears to be contemplated that not much will be payable in the way of Canadian taxes by the Trust as a result of the sale as it appears to be occurring as an asset sale by corporate subsidiaries. Although there is paltry disclosure on this point, the Canadian unitholders appear to be taking no direct risk on the Canadian tax consequences to them of the distributions as they will occur in 2015, i.e., after the 2014 disposition of the assets.
Neal Armstrong. Summary of Dixie Energy Trust Circular under Spin-offs and Distributions – Liquidations – Trust Liquidations.
There is no rollover where a 2nd tier partnership acquires all the other partnership interests in the 1st tier partnership
The rollover in s. 98(3) (and s. 98(5)) is not available where a partnership is wound up by virtue of a partner, which is itself a partnership, acquiring all the partnership interests of the other members of the first partnership.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 23, 2014-0538171C6 F under s. 98(3).
In a transfer-pricing context, the arm’s length transfer price trumps FMV
CRA noted that where, on a non-arm’s length transfer of capital property by a non-resident in favour of a resident Canadian, the fair market value of the property differs from the arm’s length transfer price, resort should be had to the latter. CRA did not give any examples of when the two values would differ – although it did note that FMV "generally represents the highest price obtainable for a property on a sale in a free and open market between two willing, informed and prudent persons acting independently" (emphasis added).
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 26, 2014-0538201C6 F under s. 247(2).
CRA considers that two trusts can be affiliated on the basis of a deceased mutual contributor
Two trusts can be affiliated if a contributor to one trust is affiliated with a contributor to the other, for example, if the two trusts also have affiliated majority-interest beneficiaries. CRA generally considers that for these purposes a decedent can be considered to still be the contributor to a trust (based, e.g., on a bequest or an inter vivos transfer followed by her death) even though (unlike the s. 94(1) definition), the s. 251.1(3) definition does not specify that a contributor includes a decedent.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 5, 2014-0534851C6 F under s. 251.1(3) - contributor.
McKesson – Federal Court of Appeal grants amendment to McKesson appeal alleging that it was compromised by Boyle’s J’s comments thereon
Stratas JA found that, although there was no authority directly on point, the considerations respecting whether an amendment to a Notice of Appeal to the Federal Appeal could be made were similar to amendments at the trial level: is the amendment relevant to the determination of the case, would granting the amendment be prejudicial, has the appellant been dilatory and can the new ground of appeal possibly succeed?
Accordingly, he granted a requested amendment to argue that the detailed reasons of Boyle J. for recusing himself from McKesson compromised the integrity of the appeal. However, the draft memorandum submitted on this ground (which he arguably implied was "an unpacked, fluffy snowball") was too long (29 pages) to be good advocacy and was ordered to be pared back.
Neal Armstrong. Summaries of McKesson Canada Corporation v. The Queen under Rule 75, Rule 346.
McGillivray Restaurant – Tax Court of Canada finds that the narrow Silicon Graphics approach to de facto control has been expanded
Silicon Graphics states that, to have de facto control of a corporation, a person or persons must have the clear ability to effect a significant change in the board or directly influence the shareholders. Boyle J confirmed that more recently (e.g., Mimetix) it has been appropriate to rely on "who controlled day‑to‑day operations, who made all the decisions, who signed all the business agreements, invoices and cheques, and who was in a position to exert economic pressure in order to have its will prevail with respect to the business and… the corporation." This might indicate that if (as in this case) the shareholder of one corporation is the dominant executive for both his corporation and his wife’s, the two corporations will be under common de facto control even if it is not clear that the above Silicon Graphics criteria are satisfied.
Neal Armstrong. Summary of McGillivray Restaurant Ltd. v. The Queen, 2014 TCC 357 under s. 256(5.1).