News of Note
Income Tax Severed Letters 24 September 2014
Email this ContentThis morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA expands its discussion of income interest transactions
The CRA Folio on dispositions of income interests in trusts expands significantly on the discussion in IT-385R2, including providing an example illustrating the consequences of the gift by an income beneficiary of a personal trust of his income interest to his son. The previous delineation of the distinction between a disclaimer and a release has been retained.
Neal Armstrong. Summaries of S6-F2-C1: "Disposition of an Income Interest in a Trust" under s. 106(2) and s. 106(1).
CRA Folio on trust residence does not apply a fully corporate model of central management and control
CRA’s Folio on trust residence recognizes that the touchstone for residence of a trust is the place of actual exercise of its central management and control rather than the trustees’ residence. Where trustees in different jurisdictions are involved in trust management, the trust will reside where "the more substantial central management and control actually takes place." After noting that central management and control may rest with the settlor or beneficiaries, CRA states that it will review any decision-making limitations on the trustees and "the ability of a trustee and other persons to select and instruct trust advisors with respect to the overall management of the trust."
Application of the corporate central management and control test often focuses on where board meetings are held. The Folio contains no explicit references to where the trustees meet, which might have been helpful for those addressing issues of income fund or REIT residence.
Neal Armstrong. Summary of S6-F1-C1 under s. 2(1).
Hudbay may settle warrants on its common shares by delivering shares equal to their in-the-money value
In July, Hudbay acquired most of the common shares of Augusta Resources, and issued 0.315 of a Hudbay common share and 0.17 of a warrant to acquire a Hudbay common share in consideration for each Augusta share.
The current second stage squeeze-out transaction was complicated by the need to provide the same warrant consideration. On an amalgamation of Augusta with a Newco grandchild Hudbay subsidiary, the minority Augusta shareholders will receive Hudbay common shares and redeemable preference shares of Amalco (having full stated capital). These prefs will be redeemed immediately by the delivery of Hudbay warrants.
The tax consequences to a warrantholder of Hudbay electing, following exercise by the warrantholder, to settle the warrants by issuing Hudbay common shares equal to the warrants’ in-the-money value, are unclear both in Canada and the U.S.
Neal Armstrong. Summary of Augusta Resource Circular under Mergers & Acquisitions – Subsequent Acquisition Transactions – Amalgamations – Shares and Warrants.
CRA rules on stepping-up PUC in a pipeline transaction
An 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).