News of Note
CRA considers that a note issuance by a personal trust does not qualify as a trust property distribution for s. 107(2) rollout purposes
Email this ContentAlthough 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).
Finance provides comfort that additional persons becoming affiliated with an “actual” majority interest beneficiary will not trigger a loss restriction event
In 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).