News of Note
Vitaliy Anissimmov of Rulings speaks at the 2014 TTPG Q&A
Email this ContentHighlights of CRA responses at the Toronto Tax Professionals Group Seminar held today include:
- Q.1. Swirsky has not changed the IT-533, para. 31 policy re interest on common share financings.
- Q.4. A reverse earn-out obligation of Newco, to fund its acquisition of Target, which is extinguished after Newco’s investment in Target disappears on the post-acquisition amalgamation, will be an "excluded obligation" for debt forgiveness purposes, as s. 143.4 would have operated immediately to grind the cost of the Newco shares.
- Q.5. CRA likely will apply GAAR to any future D & D Livestock situations and, more broadly, considers that GAAR generally applies to duplication of tax attributes (sounds a bit like Copthorne).
- Q.7. The 92 CMTC guidelines on choice of reporting currency still stand notwithstanding an amendment to Reg. 5907(6).
Mickey Sarazin thinks the Directorate has been giving too high a priority to technical interpretations. The pre-rulings consultation process is starting to take off.
Neal Armstrong. Summaries of 6 November 2014 TTPG Q&A and Presentation of Mickey Sarazin.
Agnico-Eagle - Tax Court of Canada finds that the U.S. dollar principal of a convertible debenture should be considered on conversion to have been settled at the historical exchange rate
Woods J applied Teleglobe for the proposition that where a debt is repaid with shares, the debt should be considered to have been settled for the amount for which such shares were issued. She found that when U.S. dollar convertible debentures of Agnico-Eagle were converted after the underlying shares had substantially appreciated in Canadian dollar terms (as well as in depreciated U.S. dollars), the "true consideration" for the shares issued on conversion should be considered to have been received by Agnico when the debentures were previously issued and the conversion price was agreed to. Accordingly, the repayment proceeds of 71.4 common shares per debenture received on conversion, which (applying the above fiction of valuing those shares at the original conversion price) was U.S.$1,000 per debenture, should be converted to Canadian dollars at the exchange rate prevailing at the time of debenture issuance rather than at the time of conversion (when the U.S. dollar had depreciated considerably). Therefore, no FX gain was realized under s. 39(2) on conversion.
Although the Agnico board in fact had not assigned a dollar stated capital to such shares, the effect was similar to setting their dollar stated capital as the Canadian dollar equivalent at the date of debenture issue of their U.S. dollar conversion price, and then finding that this Canadian-dollar stated capital was what the debentures were repaid for. Agnico’s alternative argument, that s. 51(1) "provides that on a conversion ... there was no transaction that could give rise to a gain," was not considered.
This case has broader implications than FX treatment of corporate convertible debentures. For example, it suggests that convertible debentures of income funds should be considered to be repaid for their principal rather than their appreciated value, so that no deemed interest arises under ss. 214(7) and (14).
Neal Armstrong. Summaries of Agnico-Eagle Mines Limited v. The Queen, 2014 TCC 324 under s. 261(2) and General Concepts - Evidence.
CRA interprets s. 90(6) so as to avoid a double income inclusion for an upstream loan (or a phantom inclusion where a loan has been timely repaid)
In a technical interpretation published today but previously discussed by Barnicke and Huynh, a grandchild foreign subsidiary (FA 2) of Canco, which made a loan to Canco, is wound-up into the immediate subsidiary (FA 1). This results in a second income inclusion to Canco under the upstream loan rule (s. 90(6)) – yet Canco will be entitled under s. 90(9) to only one deduction for the exempt surplus of FA 2 which moved up to FA 1 on the liquidation. However, CRA will apply s. 248(28)(a) to avoid such double inclusion.
If under the same structure, FA1 merges with FA2 to form a new entity, so that Canco is considered to have incurred a loan to a new entity (Amalco), CRA will accept that the timely repayment by Canco of the "new" loan should also be treated as repayment of the old loan which was incurred to the predecessor (FA2), so that there is no income inclusion under s. 90(6) with respect to either loan.
Neal Armstrong. Summary of 14 November 2013 T.I. 2013-0499121E5 under s. 90(6).
CRA finds that an uninsured medical service providing health benefits is not GST-exempt if it is made for some other purpose
A GST-exempt "qualifying health care supply" is a supply made for the purpose of maintaining health, preventing disease, or treating injury, illness or disability or assisting in coping therewith (including palliative care). CRA emphasizes the "purpose" word, so that medical services that might assist an individual’s health will not be exempt if they are made for a non-medical purposes such as an insurance claim or a court assessment.
However, CRA acknowledges that where there is a single supply of both a health care and (say) litigation-related service and that "supply has multiple purposes, that supply would be a qualifying health care supply if any of the purposes is a purpose included in the definition of qualifying health care supply."
Neal Armstrong. Summary of Notice 286 Draft GST/HST Policy Statement - "Qualifying Health Care Supplies and the Application of Section 1.2 of Part II of Schedule V to the Excise Tax Act to the Supply of Medical Examinations, Reports and Certificates" under ETA Sched. V, Pt. II, s. 1 – "qualifying health care supply".
Income Tax Severed Letters 5 November 2014
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Whiting acquisition of Kodiak relies on the most recent FAD draft legislation, does not offer exchangeable shares and uses a survivor-style amalgamation
Kodiak, which carries on its U.S. oil and gas business through U.S. subsidiaries, will be continued from the Yukon to B.C., and then will be acquired by a B.C. sub of Whiting (a Delaware corp) under a B.C. Plan of Arrangement. The Kodiak shareholders will receive Whiting common shares from Whiting sub, with the sub simultaneously issuing common shares to Whiting in consideration for such Whiting common shares.
Under the most recent (20 October 2014) version of draft amendments to s. 212.3(7), the simultaneous issuance of shares of the acquisition sub to Whiting with the acquisition of Kodiak (viewed as a "10(f)" corp) will be sufficient to absorb any deemed dividend otherwise arising to Whiting under the foreign-affiliate dumping rules – in contrast to the 16 August 2013 version of the draft amendments which generally provided for the absorption of such a deemed dividend by the paid-up capital of a cross border class of shares only "immediately before" the investment time (see Example 7-F).
The exchange by Canadian shareholders of Kodiak will occur on a non-rollover basis (and the disclosure does not waste ink mentioning the ancient outstanding Finance proposal to explore introducing a rollover). Use of exchangeable shares (see Molycorp/Neo Material and Mamba/Champion) likely would not have been seriously considered assuming that the Canadian shareholder base is not substantial and given that the transaction as structured likely produces U.S. rollover treatment.
Following the acquisition of Kodiak, it will be amalgamated with the acquisition sub, with Kodiak as the survivor. This type of non-continuation amalgamation helps the merger qualify as a reverse triangular "E" merger for Code purposes, rather than a forward triangular "D" merger. Such a non-continuation style amalgamation likely will qualify as an amalgamation for ITA s. 87 purposes (see 2010-0355941R3).
Neal Armstrong and Abe Leitner. Summary of Kodiak Oil 14A Proxy Statement under Mergers & Acquisitions - Cross-Border Acquisitions – Inbound – Canadian Buyco.
Finance makes adverse retroactive change to the FAD rules
An adverse retroactive change in the draft October 20, 2014 foreign affiliate dumping amendments is that a PUC grind, in the situation where there is more than one cross-border class of shares with the same proportionate ownership by the non-resident parent (and non-resident corporations which do not deal with it at arm’s length), must now also occur on a proportionate basis, rather than the Canadian "CRIC" subsidiary getting to choose the class to which the grind occurs. For example, if the parent owned all of a CRIC's common and preferred shares, under the previous August 16, 2013 draft rule the PUC reduction might have been expected to apply only to the common shares. If in the interim the CRIC had, say, redeemed the preferred shares, a deemed dividend could be triggered as a result of this retroactive change.
Neal Armstrong. Summary of Paul Barnicke and Nelson Ong, "FA Dumping: PUC Offset," Canadian Tax Highlights, Vol. 22, No. 10, October 2014, p. 5 under s. 212.3(7).
Vachon – Federal Court of Appeal finds that carelessness to open up a statute-barred year must relate to the return filing
Carelessness which justifies opening up an otherwise statute-barred taxation year must be carelessness at the time of filing the return. Accordingly, Scott JA annulled a decision of Tardif J that opened up a year on the basis of the taxpayer’s failure to follow up when he received demands from CRA relating to already-filed returns (which may have been altered by his accountant without his authorization before filing).
This is consistent with the mooted proposition (see also 2005-011324) that there is no obligation to amend a return when an innocent error is subsequently discovered.
Neal Armstrong. Summary of Vachon v. The Queen, 2014 CAF 224 under s. 152(4)(a)(i).
MacDonald – Tax Court of Canada case suggests that an operating corporation can have no de jure or de facto director
A shareholder of a corporation who had not been appointed as a director and who, unknowingly but in circumstances of extreme carelessness on his part, was named to third parties such as CRA and the corporate bank, as the corporation’s sole director, nonetheless was found not to be a de facto director of the corporation, so that he did not face personal liability for unremitted sources deductions and HST. Rossiter ACJ found that "the concept of de facto director ... should be limited to those who hold themselves out as directors," which did not advertently occur here.
This case indicates that it is possible for an operating corporation to have no director including a de facto director. However, the circumstances where this may have occurred in this case are unusual enough that there may not be broad policy concerns for CRA or Finance.
Neal Armstrong. Summary of MacDonald v. The Queen, 2014 TCC 308 under 227.1(1).
International Hi-Tech – Tax Court of Canada finds that secured creditors of a bankrupt corporation could launch a GST appeal in the name of the corporation
S. 266 of the ETA indicates that a receiver for a secured creditor who has taken control of a debtor’s property under its security interest "shall be deemed to be an agent of the [debtor] and any supply made or received and any act performed by the receiver in respect of [such]… assets… shall be deemed to have been made , received or performed...as agent on behalf of the [debtor]." Bocock J found that, after the receiver for the shareholder (and affiliates) of a bankrupt corporation acquired essentially all its assets out of the bankrupt estate pursuant to their security interest, it could bring an appeal in the name of the corporation to recover denied input tax credit claims, notwithstanding that the trustee in bankruptcy had not authorized such proceeding.
Although startling, this result is not literally inconsistent with the bolded words, i.e., there is nothing stating that the receiver’s agency is restricted to making or receiving supplies on the debtor’s behalf.
He implicitly treated the ITC entitlement as having been assigned to the receiver without discussing the prohibition in the s. 67 of the Financial Administration Act against the assignment of Crown debts. However, this point does not undercut the above branch of his decision and in fact reinforces the approach taken of bringing an action in the name of the corporation to get the cash.
Neal Armstrong. Summary of International Hi-Tech Industries v. The Queen, 2014 TCC 198 under ETA, s. 266(2)(a).