News of Note
CRA may require the dismantling of an exchangeable unit structure on conversion of a REIT to a closed-end fund
Email this ContentSimilarly to 2011-0410181R3, CRA gave opinions rather than rulings on the application of the s. 108(2)(b) tests following the conversion of an open-end REIT into a closed-end one. The ruling letter states that special voting units were removed from the Declaration of Trust "to ensure that Trust can satisfy the criteria under subparagraph 108(2)(b)(vi)" (which provides that "the units" of a trust which satisfies the 80% asset test through holding Canadian real property must be listed). Any proposition that this was necessary is questionable, as special voting "units" represent contractual voting rights rather than any beneficial interest in the property of the trust. In this case, it may not have been a big deal as no special voting units (or corresponding exchangeable units in a subsidiary LP) happened to be outstanding.
The conversion is occurring in order that the trust can issue preferred units. CRA's "preliminary" view is that a "reclassification" at the holder's option of Series A (fixed rate) prefs as Series B (floating rate) prefs, or vice versa, will be a taxable disposition. This also may be overly form-driven. Essentially, from the outset the holder of a beneficial interest in the trust has some modest choice as to the type of distribution it will receive.
Unlike 2011-0410181R3 and 2010-0361771R3, the redacted ruling does not specify that the same proportionate allocations of income will be made on preferred and ordinary units (which significantly eases the s. 104(7.1) analysis) – but this likely was in the redacted bits.
Neal Armstrong. Summaries of 2012 Ruling 2011-0429611R3 under s. 108(2)(b), s. 248(1) - disposition and s. 104(7.1).
CRA does not provide comfort on planning to address GRIP in excess of SIOH
If Sellco’s shares of its CCPC subsidiary, Targetco, have a safe income on hand of $2M but the GRIP of Targetco is $2.6M, the payment of a $2.6M eligible dividend to Sellco (also a CCPC) will only increase its GRIP by $2M, as $0.6M of the eligible dividend would be converted into a capital gain under s. 55(2) (and notwithstanding that Targetco's GRIP in CRA's view will be reduced by $2.6M - see 2010-0385991C6). To address this, Targetco might pay a cash eligible dividend of $2M, and then Sellco might subscribe $0.6M for preferred shares of Targetco with a nominal PUC – so that the subsequent redemption of those shares could be treated as resulting in a further $0.6M eligible deemed dividend to which s. 55(2) did not apply.
CRA was not especially hostile to this planning. At the time of any subsequent eligible dividend paid by Sellco, it would be necessary to examine whether the specific anti-avoidance rule, regarding artificial increases in a corporation’s GRIP, applied.
Neal Armstrong. Summary of 11 October 2013 APFF Round Table, Q. 15, 2013-0495781C6 F under s. 89(1) - "excessive eligible dividend designation."
Nottawasaga Inn - Tax Court of Canada found that an interest-only assessment could not be appealed
A taxpayer was reassessed for its 2007 taxation year, and then requested loss-carrybacks to reduce the income for that year to nil. Pizzitelli J found that, because the resulting reassessment of the taxpayer's 2007 year to eliminate the taxes for that year (but not the interest) was a "nil assessment," the taxpayer could not appeal the interest amount included in that reassessment notice. His reasoning was that:
- a "nil assessment" actually means a notice under s. 152(4) that "no tax is payable," which is not technically an assessment - and which cannot be appealed;
- an assessment for interest or penalties is distinct from an assessment for tax; and
- an interest assessment can only be appealed on computational grounds (not in issue here) or as a result of appealing the underlying tax assessment (and there was no underlying assessment - only a nil assessment).
Scott Armstrong. Summary of Nottawasaga Inn Ltd. v. The Queen, 2013 TCC 377 under s. 169(1).
CRA considers that the right of a chair to cast the tie-breaking vote does not “automatically” confer de facto control on the representative of a 50% shareholder
CRA considers that s. 188 of the Quebec Business Corporations Act, which provides (unless otherwise provided in the by-laws) that the chair of the meeting has the deciding vote in the event of a tie, does not "automatically confer ... de facto control of a corporation on the person occupying the post of chair" in the situation where there are two equal shareholders. However, it notes that on the facts, this essentially was the result which obtained in Brownco and Avotus.
Neal Armstrong. Summary of 11 October 2013 APFF Round Table, Q. 11, 2013-0495811C6 F under s. 256(5.1).
Income Tax Severed Letters 4 December 2013
This morning's release of 13 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Versteegh – UK First-tier Tribunal finds no benefit to the parent from a downstream loan with the in-kind interest thereon paid to a sister subsidiary
A UK group of companies engaged in a childishly vacuous scheme to generate an interest deduction in one group company (the borrower) without a corresponding income inclusion to the lender or any other group company. The parent lender made a loan to a subsidiary borrower on the basis that under the loan the borrower would be required to pay interest in the form of issuance of shares to a sister company.
It was held that the shares received by the sister company were income from a source (being the loan agreement) notwithstanding that it was not a party to the loan agreement.
Another issue was whether interest should instead be imputed to the parent on the basis that its exclusion of imputed interest from its accounts did not accord with GAAP. The Tribunal accepted the characterization of the taxpayer’s accounting expert, which was that the parent had made the loan in consideration for the right to receive back the principal plus the right to require a transfer of value between its wholly-owned subsidiaries, which latter right was of no incremental value to it, so that there should be no corresponding recognition of accounting income. This sort of thinking would be helpful from a Canadian perspective if one were to worry (by broad analogy to the Vine case) about whether there was a shareholder benefit by virtue of the borrower issuing shares to the sister rather than to the parent.
Neal Armstrong. Summary of Versteegh Ltd & Ors v. Commissioners, [2013] UKFTT 642 (TC), under s. 15(1) and s. 9 – exempt receipts.
Tradehold - Supreme Court of Appeal of South Africa finds that an “alienation” for Treaty purposes includes a deemed disposal
A South African public company shifted its place of effective management to Luxembourg in 2002 (so that it became a Luxembourg resident for purposes of the Treaty with South Africa) but did not cease to be a South African resident for domestic purposes until 2003, when a domestic amendment provided that its Treaty status determined its residency status for domestic purposes.
This then triggered a deemed capital gain on its assets under the South African exit tax provisions, subject to the standard exemption in Art. 13(4) of the Treaty for "alienations" by a resident of Luxembourg of most types of property.
The Court rejected the South African Commissioner’s argument that "alienations" did not include deemed disposals (so that the company was not subject to the exit tax). This is consistent with the interpretation elsewhere of "alienation" (e.g., 84 C.R. – Q. 40).
Neal Armstrong Summary of Commissioner for South African Revenue Service v. Tradehold Limited, [2012] ZASCA 61 (Supreme Court of Appeal of South Africa) under Treaties - Art. 13.
PGNX will use its PUC in advance of its final liquidation distribution
PGNX Capital Corp. has sold all its assets and has or will distribute the net proceeds in three tranches: a stated capital distribution on November 15, 2013; a distribution that will only partly be a stated capital distribution (as there is estimated to be insufficient remaining stated capital of all of it to be a capital distribution) on December 19, 2013; and a distribution pursuant to liquidation proceedings.
The tax disclosure indicates that even if a shareholder resolution is not passed to authorize the applicable portion of the second distribution to occur as a stated capital distribution, there may still only be a deemed dividend arising under s. 84(2) on the second distribution to the extent of the Corporation’s remaining paid-up capital.
Due bills attached to the PGNX shares would effectively mean that trades in the shares after the record date and before the payment time would entitle the purchaser to receive the second cash distribution.
Neal Armstrong. Summary of Circular of PGNX Capital Corp. under Spin-Offs and Distributions - Liquidations.
Testamentary trusts will be tainted if they become “beneficially interested” in an inter vivos trust
CRA has confirmed its position in 2011-0417391E5 F that any testamentary trust which becomes beneficially interested in a Quebec inter vivos trust (including it would appear by virtue of a mere potential to be named as a beneficiary by the trustees of the inter vivos trust from amongst a larger class of potential beneficiaries) will cease to qualify as a testamentary trust under s. 108(1) because the beneficial interest in the inter vivos trust represents property which has been contributed to it other than by testator as a consequence of the testator's death.
Neal Armstrong. Summary of 11 October 2013 APFF Round Table, Q. 5, 2013-0493671C6 F under s. 108(1) – testamentary trust.
Conocophillips - Federal Court finds that it rather than the Tax Court had the authority to reverse a CRA decision that the taxpayer’s objection was out of time
The taxpayer claimed that it did not find out about a notice of reassessment which allegedly had been mailed to it on November 7, 2008 (the "date of mailing" notation on the reassessment – although the reassessment was actually dated April 26, 2010!) until April 2010. The taxpayer promptly objected, and the CRA official rejected the objection on the basis that it was out of time.
Campbell J agreed with the taxpayer that the correct procedural remedy was for the taxpayer to apply to the Federal Court for an order to set aside the official’s decision to reject its objection (there was no indication that he had really reviewed the evidence that the reassessment had not been received) rather than to appeal to the Tax Court under s. 169(1)(b). That decision was set aside.
Neal Armstrong. Summary of Conocophillips Canada Resources Corp. v. MNR, 2013 FC 1192, under s. 169(1).