News of Note
CRA finds that the fresh start rule generated deemed ECE for licensed IP of an acquired FA
Email this ContentCanco acquired a non-resident corporation (FA2) which was engaged in a non-Canadian business of licensing intellectual property to third parties and also to a subsidiary (FA3) for use in its active business. FA2's business was deemed to be a separate non-active business under s. 95(2)(a.3), as the IP came within the extended definition of "lease obligations."
Headquarters concluded that there was a deemed eligible capital expenditure on the IP under the fresh start rule notwithstanding a number of ambiguities, including the fact that the ECE definition requires that there be an "outlay or expense ... as a result of a transaction," which did not "mesh well" with the deemed acquisition of the IP at FMV under the fresh start rule.
Although the fresh start rule would not have applied if FA2 instead had been merely earning income from property, Headquarters 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."
Neal Armstrong. Summary of 31 July 2014 Memo 2014-0536581I7 under s. 95(2)(k).
Income Tax Severed Letters 12 November 2014
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Shares underlying flow-through warrants need not qualify as flow-through shares
Although junior issuers commonly "sweeten" flow-through offerings with warrants with a view to the total proceeds, including those allocated to the warrants, qualifying for renunciation, it is rare for the issuer to covenant that the common shares to be issued on exercise of the warrants will also qualify as flow-through shares (as this effectively could amount in a commitment to engage in Canadian exploration in, say, four years’ time).
CRA agrees that this is unnecessary to qualify the warrants for flow-through treatment. This is obvious on the statutory wording. However, a badly-expressed earlier CRA position (2010-0384341C6) seemed to say the opposite.
Neal Armstrong. Summary of 5 September 2014 T.I. 2014-0534941E5 under s. 66(15) – flow-through share.
CRA finds that GST applies to the provision by a charity, hospital or university of naming rights to a sponsor
ETA s. 135 deems a supply of a service, or a licensing of copyright, trademarks, trade names or similar IP, by a public sector body (e.g., a charity, NPO, hospital or university) to promote a sponsor’s business to not be a supply, so that no GST or HST is payable.
The provision of naming rights is not considered by CRA to be a supply of a service or licensing of IP, so that it is taxable.
CRA notes that where s. 135 does apply, this does not adversely affect the PSB’s ability to claim an input tax credit.
Neal Armstrong. Summaries of Excise and GST/HST News - No. 93 under ETA s. 135 and s. 141.01(7).
Vitaliy Anissimmov of Rulings speaks at the 2014 TTPG Q&A
Highlights 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.