News of Note
CRA rules on stepping-up PUC in a pipeline transaction
Email this ContentAn estate, which on death acquired preference shares of a portfolio investment company (Investmentco) at a stepped-up tax cost, will effectively also step-up the paid-up capital of its shareholding by selling its prefs to a Newco for Newco prefs with a high PUC. After a decent (redacted) period, Newco will amalgamate with Investmentco, and the estate will start gradually retracting its (high PUC/basis) prefs. This is a variation on the more typical "pipeline" transactions (most recently in 2013-0503611R3, 2012-0464501R3 and 2012-0401811R3) where the estate sells its shares instead for a promissory note of Newco.
This provides some additional comfort for transactions in which a resident individual such as a REIT steps-up PUC by transferring its shares of Target to Newco for high-PUC Newco shares, and causes their amalgamation.
Neal Armstrong. Summary of 2014 Ruling 2014-0526361R3 F under s. 84(2).
Auxilium’s obligation to effectively migrate to Canada through a merger with QLT has a limited “out” if the U.S. inversion rule is amended
It is proposed that Auxilium, a Delaware biopharmaceutical company, merge with an indirect Delaware subsidiary of QLT, a B.C. biotech company. On the merger, Auxilium shareholders would become holders of around 76% of the common shares of QLT, i.e., less than the 80% threshold that would be one of the touchstones for QLT to otherwise be deemed to be a U.S. corporation under the current U.S. inversion rule in Code s. 7874. Auxilium’s obligation to complete the merger is subject to there being no adverse change in s. 7874 (whether or not yet effective) by October 31, 2014 or a bill to so amend s. 7874 having passed both houses of Congress by then – whereas the outside date for the merger is December 31, 2014. Accordingly there are circumstances where the merger might go ahead even if there has been an adverse s. 7874 change or such a change is well advanced.
The disposition of their Auxilium shares for QLT shares will not occur on a rollover basis for U.S. shareholders in light of the Code s. 367(a) rules.
Neal Armstrong and Abe Leitner. Summary of S-4 of QLT Inc. under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Reverse Takeovers.
CRA acknowledges that a corporation is a blocker for recognizing a multi-tier partnership
Subject to exceptions, s. 249.1(1)(c) provides that a partnership must have a calendar year end if it "is a member of another partnership." CRA recognizes that this stipulation is not triggered if a partnership corporate subsidiary is a member of another partnership.
And, no, this is not a concern re s. 88(1)(c.2)(iii), which uses the much broader concept of a "direct or indirect interest in…shares" of another corporation.
Neal Armstrong. Summaries of 18 August 2014 T.I. 2014-0528001E5 under s. 249.1(1)(c) and s. 249.1(4).
Hedges – Tax Court of Canada decision suggests that patients must pay GST or HST on their purchases of medical marihuana
The zero-rating of controlled drugs in Sched. VI, Part I, s. 2(d) would apply to dried marihuana if it qualified as a "drug" which, by virtue of the Marihuana Medical Access Regulations, may only be sold to a consumer with a "prescription" or under an "exemption" from Health Canada. C Miller J found that although dried marihuana was a drug, the ailment certification by a medical practitioner in order for a consumer to be granted an "Authorization to Possess" by Health Canada was not a prescription, nor was such ATP an "exemption."
Although the taxpayer in this case was an unlicensed producer selling to an unauthorized purchaser, the same reasoning suggests that licensed producers also are required to charge GST or HST to consumers with ATPs.
Neal Armstrong. Summary of Hedges v. The Queen, 2014 TCC 270 under ETA, Sched. VI, Part I, s. 2(d).
Income Tax Severed Letters 17 Septemeber 2014
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Devon Canada – Tax Court of Canada finds objecting large corporations need not specify partial expense deductibility in the alternative to full deductibility
Graham J found that if a large corporation objects on the basis that an expense is fully deductible, it is not precluded by the no-new-issue rule in s. 169(2.1) from arguing on appeal that the item is partly deductible in that year, e.g., under s. 20(1)(e). Similarly, when it specifies relief based on the full deduction, it is impliedly requesting pro rata relief if there instead is only partial deductibility.
Neal Armstrong. Summary of Devon Canada Corporation v. The Queen, 2014 TCC 255 under s. 169(2.1).
US LLLPs are partnerships
Notwithstanding that CRA declined (in 2014-0523041C6) to conclude on the point outside the context of a ruling request, a Delaware limited liability limited partnership should qualify as a partnership for Canadian taxation purposes given that it is essentially the same thing as a "regular" Delaware LP except for some somewhat enhanced limited liability protection.
Neal Armstrong. Summary of Kenneth Snider, "US Limited Liability Partnerships – DRUPA Revisited," International Tax (Wolters Kluwer CCH), Number 77, August 2014, p. 4 under s. 96.
CRA finds that "gross revenue" does not include cost rebates or subsidies such as volume rebates.
Although the definition of "gross revenue" includes all amounts received or receivable by the taxpayer (other than on capital account), CRA considers (at least for inter-provincial income allocation purposes under Reg. 402(3)) that gross revenue does not include amounts received in respect of taxpayer expenditures such as volume rebates or government assistance.
Similar issues arise under the "gross REIT revenue" definition in s. 122.1, which on a literal reading could include a wide range of receipts such as loan proceeds.
In 2010-0382161I7 F, CRA indicated that rebates or discounts only represent cost reductions rather than gross revenue if they are a price reduction at the time of purchase rather than being crystallized subsequently based on, say, yearly purchase volumes. (If purchased inventory is not sold until a subsequent year, this affects the timing of income recognition.) CRA noted that the above interpretation reverses this earlier position.
Neal Armstrong. Summary of 31 March 2014 Memo 2013-0514921I7 under s. 248(1) – gross revenue.
Marret Fund will convert from a forward sale fund to a conventional bond fund
The Marret Investment Grade Bond Fund currently achieves deferral and capital gains treatment on an underlying portfolio of mostly foreign bonds by having entered into a forward agreement for the sale of TSX-listed companies at prices reflecting the performance of the portfolio held in other hands. This arrangement will cease to be grandfathered from the character conversion (a.k.a. derivative forward agreement) rules if the maturity date of the forward agreement of October 31, 2014 is extended.
Accordingly, the forward agreement will be settled, the resulting net capital gain will be distributed to the unitholders and the Fund will continue on investing in the underlying portfolio directly.
There will be more transactions like this.
Neal Armstrong. Summary of Marret Investment Grade Bond Fund Circular under Other – Conversions – Forward Sale Fund to Conventional Fund.
CRA rules and opines that deemed (s. 214(7)) interest on the conversion or sale of a convertible debenture is not participating debt interest
A 2012 ruling letter (2011-0418721R3) ruled that the interest coupons on a U.S.-dollar convertible note (whose terms were "plain vanilla" except that the issuer had the option to satisfy a conversion request by paying cash, and there is no period prior to maturity during which there is an unfettered right to convert) were not participating debt interest, so that the interest coupons paid to an arm’s length note purchaser (ACO) would not be subject to Part XIII tax. An amendment to this ruling letter now provides that "any" amount deemed under s. 214(7) to be a payment of interest on conversion of the Note by ACO also will not be subject to Part XIII tax.
Furthermore, CRA opined that on a sale of the note by ACO to an arm’s length Canadian-resident purchaser for cash "any amount deemed to be a payment of interest…. under subsection 214(7) would not in general constitute ‘participating debt interest’." (This presumably was given only as an opinion as such a purchaser has not been lined up.)
Neal Armstrong. Summary of 2012 Ruling 2011-0418721R3, as amended by 2014-0532411R3, under s. 212(3) – participating interest.