News of Note
CRA finds that no s. 39(2) gain arises on a CFA distribution of U.S.-dollar stated capital
Email this ContentCanco used U.S. dollars to subscribe for common shares of a non-resident sub ("Foreignco"), having a U.S.-dollar stated capital. CRA confirmed that no s. 39(2) FX gain arose when (prior to 2011 and after appreciation in the U.S. dollar), Canco received a U.S.-dollar distribution of a portion of this stated capital. It reasoned that the U.S.-dollar appreciation increased the resulting ACB grind under s. 53(2)(b)(ii), thereby also increasing the ultimate capital gain when the Foreignco shares were disposed of (or when a negative ACB gain arose under s. 40(3).) Therefore, recognizing a s. 39(2) FX gain on the distribution would result in double taxation.
A similar approach would have applied if there had been a (post-2011) qualifying return of capital.
Neal Armstrong. Summary of 22 January 2015 Memo 2014-0560571I7 under s. 39(2).
Income Tax Severed Letters 29 April 2015
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kruger Wayagamack – Tax Court of Canada finds that USA restrictions on a majority shareholder’s ability to take strategic decisions negatived de jure and de facto control
Kruger Inc. was the 51% shareholder of the taxpayer and was entitled under the unanimous shareholders agreement between it and the other shareholder (SGF) to appoint three of the five directors – so that it obviously controlled de jure the taxpayer.
Not so fast! Jorré J found that such a wide range of decisions were specified in the USA to require unanimous director (or shareholder) approval – to the point that he characterized Kruger as having control of only operating, and not strategic, decisions – that Kruger did not have de jure control.
Kruger also did not have de facto control, notwithstanding that is was appointed the manager and marketing agent for the taxpayer under long-term agreements.
However, the taxpayer was associated with Kruger under s. 256(1.2)(c) as the Kruger bloc had more that 50% of the fair market value of all the shares. The 49% bloc might have had a greater value to SGF than that of the 51% bloc to Kruger because of a contingent put right accorded to SGF under the USA. However, since this put could not be assigned to any third-party purchaser, it did not affect the shares' FMV.
Neal Armstrong. Summary of Kruger Wayagamack Inc. v. The Queen, 2015 TCC 90 under s. 256(1)(a) and s. 256(1.2)(c).
CRA rules on the elimination of a REIT sub trust through s. 107.4 transfer to a new “in house” MFT and a s. 132.2 merger of MFT into REIT
CRA has ruled respecting the elimination of an open-end listed mutual fund trust (which likely is a REIT) of its subtrust on a rollover basis. First, the subtrust will transfer its assets (being units of subsidiary real estate partnerships and the shares of the GPs) under s. 107.4 to a newly-formed subsidiary unit trust ("MFT") of the REIT, with a small percentage of MFT's units then being distributed to the REIT unitholders in order to qualify MFT as a mutual fund trust. MFT then will be merged into the REIT under s. 132.2. These same general mechanics have been ruled on previously (see s. 132.2 – qualifying exchange).
It was contemplated that the transaction would be implemented without a plan of arrangement (e.g., the second stage of the s. 132.2 merger is to be implemented through a unilateral redemption of units). The proposed transactions specify that the MFT’s Canadian-resident trustee will not be a director of any of the GPs.
Neal Armstrong. Summary of 2013 Ruling 2013-0492731R3, amended by 2014 Supplement 2014-0518511R3 under s. 107.4(1).
CRA finds that a day-trading MFT can allocate capital gains to its unitholders
A mutual fund trust which engages in day trading on margin in Canadian securities nonetheless can make the election under s. 39(4) for capital gains treatment, and make a s. 104(21) designations on its distributions so that its unitholders (including, apparently, traders such as investment dealers) will receive capital gains treatment on the distributions. However, making the election may suggest that the mutual fund trust's expenses do not satisfy the income-producing purpose test in s. 18(1)(a) (although this may not matter in light of specific expense deduction provisions such as s. 20(1)(bb)).
Day trading generally would not be inconsistent with having an undertaking of investing its funds in property as required by s. 132(6).
Neal Armstrong. Summaries of 24 March 2015 T.I. 2012-0470991E5 F under s. 39(5)(a), s. 132(6) and s. 9 – capital gain v. profit – shares.
CRA implicitly finds that creditors’ approval of a CCAA plan of compromise for a trust which was economically captive to them did not cause them to act in concert
CDS trusts entered into credit default swaps with counterparties desiring credit protection for their bond portfolios and funded their purchase of the required collateral for their CDS obligations by issuing short-term notes. Most or all of these trusts defaulted on their notes in the 2008 financial crisis.
One such trust settled litigation with its non-resident CDS counterparty (the "Bank") under a compromise which was voted on and approved by the Noteholders under a CCAA plan. Under this settlement, the Bank made payments under the CDS, which were applied by the Trust to repay all of the unpaid Note principal but only a portion of the unpaid interest (with recourse for such interest obligations being specified in the CCAA plan to be only to the Trust assets.) In the meantime, the Bank had acquired some of the Notes directly and through non-resident subsidiaries.
CRA ruled that interest so paid to the Bank and its subs was not "participating debt interest," stating that the fact that the interest paid was "based on the available cash in the Trust…does not impact the conclusion that the interest… is not being computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion."
CRA also ruled that the entering by the Bank and its subs into the settlement would not by itself result in their being considered to not deal at arm's length with the Trust. This did not directly address the more interesting issue of whether the Noteholders collectively (and, therefore, perhaps each Noteholder, such as the Bank, individually) should be considered to be not dealing at arm’s length with the Trust having regard to the Trust being economically captive to its Noteholders (i.e., no one else in the circumstances could receive any Trust distribution). However, this ruling may imply that CRA was comfortable with this issue, which sounds right given that voting on the Plan and entering into the settlement should not by itself be sufficient to conclude that the Noteholders acted in concert respecting the Trust.
Neal Armstrong. Summary of 2014 Ruling 2014-0539791R3 under s. 212(1)(b).
CRA confirms that the s. 40(3.6) stop-loss rules should not apply to a CFA winding-up
In 2014-0538591I7, CRA indicated that s. 40(3.6) did not apply to deny a loss realized on the winding-up of a controlled foreign affiliate because (1) s. 69(5)(d) specifically ousts the application of s. 40(3.6) respecting property (the CFA’s shares) disposed of on a winding-up, and (2) it is unlikely that under the foreign corporate law the CFA would be considered to still exist immediately after that disposition.
CRA now recognizes that the first point was wrong, as s. 88(3) by its terms "operates notwithstanding subsection 69(5)," but stands by the second point, stating "we would expect that, under the foreign corporate law, the CFA would cease to exist and its shares would simultaneously be cancelled when the CFA was wound-up."
Neal Armstrong. Summary of 12 January 2015 Memo 2014-0560421I7 under s. 40(3.6).
CRA considers that the RSU exclusion does not apply where the participant will be able to cash out additional RSU units based on dividend equivalents
The definition of a salary deferral arrangement exclude "a plan or arrangement under which a taxpayer has a right to receive a bonus or similar payment in respect of services rendered by the taxpayer in a taxation year to be paid within 3 years following the end of the year." CRA considers that this exclusion does not apply to a dividend equivalency feature of a restricted stock units plan under which the employee is credited with additional RSU units based on the amount of dividends paid on the underlying shares, with those units to be cashed out at the same time that the related primary RSUs are exercised to acquire shares.
Neal Armstrong. Summary of 29 March 2015 T.I 2014-0526941E5 under s. 248(1) – salary deferral arrangement - para. (k).
CRA recognizes that the s. 7 rules apply to agreements to sell shares for no cash consideration
CRA recognizes (e.g., in IT-113R4, para. 7) that the s. 7 rules can apply where an employer issues its shares to an employee for no monetary consideration. After up to three years of deliberation, CRA has concluded that the s. 7 rules can also apply to an employee incentive arrangement under which an employer purchases shares of a non-arm's length corporation (e.g., an open-market purchase of its non-resident parent’s shares) and grants those shares to the employees for no monetary consideration.
Neal Armstrong. Summary of 24 March 2015 T.I. 2012-0432951E5 F under s. 7(1)(a).
The Hong Kong treaty qualifies as an agreement with the government of another country
Various ITA provisions reference the concept of an agreement with, or with the government of, another country. CRA considers that the Agreement with Hong Kong so qualifies.
Neal Armstrong. Summary of 25 March 2015 T.I. 2014-0560351E5 under s. 248(1) – tax treaty.