News of Note
Brookfield Property Partners’ second-stage acquisition of Brookfield Office Properties shares includes an exchangeable LP unit option and a deemed dividend option
Email this ContentBrookfield Property Partners ("BPY") is engaging in a second-stage transaction under a Plan of Arrangement to acquire the common shares of Brookfield Office Properties Inc. ("BPO") which were not tendered to an offer made by it in February 2014.
As in the previous offer, the consideration to be provided is cash or BPY units (with the aggregate consideration fixed at approximately 67% units and 33% cash) – except that (again as before) Canadian-resident BPO shareholders can choose to receive exchangeable units of an indirect subsidiary Ontario LP ("Exchange LP") of BPY in order to elect under s. 97(2). Perhaps in order to fit within the exchangeable share structure blessed in the Explanatory Notes on derivative forward agreements, the exchangeable units are only retractable against Exchange LP for BPY units, with no direct exchange right with BPY – although on retraction BPY has an overriding call right to acquire the exchangeable units.
An additional feature not present in the previous Offer is that BPO common shareholders also can elect to have their common shares redeemed by BPO itself for BPY units or cash, giving rise to a deemed dividend of over half the value of the consideration.
Convertible preferred shareholders of BPO generally have the option of exchanging their shares for preferred shares of an indirect BPY subsidiary which is expected to qualify as a mutual fund corporation.
Neal Armstrong. Summary of Circular for Brookfield Property Partners second-stage acquisition of Brookfield Office Properties under Mergers & Acquisitions – Subsequent Acquisition Transactions.
CRA allocates upper tier debt on a pro rata basis in a cross-border butterfly for purposes of applying the 10% limitation rule in s. 55(3.1)(b)(i)(A)(II)
In connection with a spin-off by a non-resident public company (Foreign PubCo) of its shares of a non-resident subsidiary (Foreign Spinco), there will be a butterfly split-up of an indirect Canadian subsidiary (DC) indirectly holding Canadian portions of the two businesses in question, so that the Canadian transferee corporation (TC) of DC will be a subsidiary of Foreign Spinco. In connection with the s. 55(3.1)(b)(i)(A)(II) rule, which requires that at all times less than 10% of the fair market value of the shares of Foreign Spinco be derived from shares of DC or TC, CRA indicated that any indebtedness of Foreign SpinCo will be considered to reduce the FMV of each property of Foreign SpinCo pro rata in proportion to the relative FMV of all property of Foreign SpinCo. As with other cross-border butterflies, there will be a three-party share exchange agreement - see 2013 CTF Annual Roundtable, Q. 11.
CRA did not rule, one way or the other, that a preliminary share capital reorganization of DC, under which the old common shares will be exchanged for special butterfly shares and new common shares with the same attributes as the old common shares except for the prior rights of the butterfly shares, will qualify under s. 86. For purposes of categorization of the types of property of DC, current and non-current pension liabilities will reduce cash or near-cash, or business, assets respectively.
Neal Armstrong. Summaries of 2013 Ruling 2013-0491651R3 under s. 55(1) – distribution, s. 55(3.1)(a), s. 55(3.1)(b)(i) and s. 86(1).
Joint Committee Treaty Shopping Submission
The CBA/CPA Joint Committee made its submissions today to Finance on the February 2014 Budget treaty shopping proposals.
CRA finds that a Canadian equipment installation project which exceeded 12 months, including on-site preparation of plans and final testing, was a permanent establishment
CRA found that a contract of a French company to install specialized equipment at a Canadian factory of an arm’s length Canadian company gave rise to a Canadian permanent establishment of it given its general on-site responsibility for ensuring a successful project and given that the the project lasted more than 12 months including preparing detailed specs on-site and final testing – so that the 12 month safe harbour for installation projects in Art. 5, para. 3 of the Canada-France Convention was not available. The Directorate’s analysis essentially stopped after finding that the project was an installation project that lasted more than 12 months, so this may imply (see also Dudney) a view that installation projects which exceed this limit will invariably be pe’s on general principles.
Neal Armstrong. Summary of 11 April 2014 T.I. 2013-0474851I7 F under Treaties – Art. 5.
Hakki – English Court of Appeal finds that poker winnings of a professional gambler were not from a trade or business
A U.K. poker gambler, who consistently earned around £500 a week by carefully picking tables and refraining from making bets until the situation seemed favourable, was found not to be engaged in a trade or business. This might be more generous than the Canadian authorities, which may suggest that a gambler will become taxable on winnings when "a clear and consistent record of accomplishment in poker" is established: Alarie, see also Balanko, Leblanc, and 3 April 2014 T.I. 2013-0512371E5 F.
Neal Armstrong. Summary of Hakki v. Secretary of State for Work and Pensions & Anor, [2014] BTC 22, [2014] EWCA Civ 530 under s. 3.
CRA finds that a separate copyright royalty paid for the use of music in a film is exempted from withholding
Although copyright royalties for the production or reproduction of musical or artistic works generally are exempted under s. 212(1)(d)(vi), under s. 212(5) this exemption does not apply (in the absence of Treaty relief) where the payments are for the right to use a film in Canada. CRA does not consider that this exclusion will apply where separate copyright royalties are paid to a non-resident for the right to reproduce music which is used in a film.
Neal Armstrong. Summary of 1 March 2014 T.I. 2013-0514291E5 F under s. 212(1)(d)(vi) (see also 2011-0424221I7).
CRA finds that a partnership is transparent for Treaty gains exemption purposes
The gains exemption in the Canada-Singapore Convention does not apply to "gains from the alienation of shares of a company, or of an interest in a partnership or a trust, the property of which consists principally of immovable property… ." Given this "consists of" rather than "derived from" wording, CRA accepts that this provision does not apply to a sale by a Singapore resident of shares of a Canadian company (Canco) which does not directly hold Canadian real estate. However, where the Canco held Quebec immovable property through two partnerships, CRA considered that the partnerships
are not distinct persons for purposes of the Convention and that their respective patrimonies can be assimilated to that of their members [so that] the Canadian immovable properties which are held by means of [them] should be considered as being directly held by Canco to the extent of its interests in them.
Accordingly, the gain on selling Canco shares was not Treaty-exempt. Given that the Treaty wording quoted above treats partnership interests as distinct and that a particular partner does not own partnership property, this interpretation is debatable.
Neal Armstrong. Summary of 14 April 2014 Memo 2013-0516151I7 F under Treaties – Art. 13.
Income Tax Severed Letters 14 May 2014
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Most multi-national employee benefit plans with Canadian employees face intractable issues in applying the NRT rules
The non-resident trust rules in s. 94 are at odds with the realities of global employer benefit plans. Among other issues:
- It may be unclear whether a (usually foreign law) plan is a trust or a custodial arrangement – or it might be both, such as a U.K. sharesave plan.
- The typical non-U.S. multinational EBP will not satisfy the requirement in para. (g) of the "exempt foreign trust" definition that it provide benefits primarily for services rendered in its country of residence – for example, a U.K. retirement plan which is established in Jersey, or a French "trust" where the French employees represent only 49% of the worldwide workforce.
- Respecting the s. 94(2)(k.1) rule deeming there to be a resident contribution when any person has made transfers for the benefit of an employee of a Canadian employer, it may be difficult to determine whether ad hoc contributions to the global EBP by the foreign parent are made in respect of any particular employee - for example, if the parent contributed in 2010, and the first award to an employee of a Canadian entity is made in 2013.
- Application of the exemption for "qualifying services" may require determining when services for a particular award are rendered – for example, if an employee who will become a "bad Canadian" under a 60-month rule is granted a new three-year vesting RSU, when are the services rendered to which this award relates?
- If the trust elects to limit its exposure to Canadian tax on the "resident portion" of the trust, looking at the ratio of the beneficial interests of the Canadian employees versus the others may not reflect the actual contributions which have gone into the trust – nor may it be appropriate to assume that vested beneficial interests are equal to interests with a substantial risk of forfeiture.
Neal Armstrong. Summaries of Peter Megoudis, "The Canadian Non-resident Trust Rules and Global Employee Benefit Plan Trusts," Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24, No. 3, October 2012 [sic], p. 1583 under s. 94(3), s. 94(1) – exempt trust – (g), s. 94(2)(k.1), s. 94(1) – exempt trust – (f), and s. 94(1) – resident portion.
Hafizy - Federal Court of Appeal observes that appellants must topple the tree rather than tearing off branches
In appeals of Tax Court decisions before the Federa Court of Appeal, the standard of review for conclusions of mixed fact and law is "palpable and overriding error" (see McGoldrick). Gauthier JA has repeated an admonition of Stratas JA that:
When arguing palpable and overriding error, it is not enough to pull at leaves and branches and leave the tree standing. The entire tree must fall.
Neal Armstrong. Summary of Hafizy v. The Queen, 2014 FCA 109 under s. 180(3).