News of Note

High Desert Gold is to be acquired under a joint BC plan of arrangement by South American Silver ("SASC") for SASC shares.  However, to ensure that HDG shareholders do not share significantly in any arbitration award made as a result of the seizure of a Bolivian mine of a subsidiary of SASC, SASC first will undergo a s. 86 reorganization under which its common shares will be exchanged for Class A shares (with rights apparently identical to the common shares), and Class B shares which are redeemable and retractable for 85% of any net arbitration award or settlement, subject to an overriding call right of a SASC subsidiary (Newco) to purchase the shares for the redemption amount.  Thus, the HDG shareholders will receive only Class A shares (which will be promptly redesignated as common shares).

There is no discussion in the Circular as to how the stated capital of the Class B shares will be determined, which might initially trade on the TSX for far less than any ultimate award.  The Newco call right might be intended to avoid tax under Parts IV.1, VI.1 or XIII, although there is no suggestion that the Class B shares are taxable preferred shares nor any specific comment that redemption of the Class B shares could give rise to a deemed dividend.

SASC will be continued to BC before the arrangement, as the corporate incest rules in the CBCA would prohibit Newco from exercising its call right.

Neal Armstrong.  Summary of South American Silver Circular under Public Transactions – Mergers – Share-for-Share.

An LLC had been used in a classic tower structure that then was unwound.  The Rulings Directorate noted that CRA had applied the general anti-avoidance rule to transactions which had sought to avoid the application of the stop-loss rule in s. 93(2) to a capital loss realized on the winding-up of the LLC (as part of the dismantling of the tower structure) by first continuing the LLC under the CBCA.

Turning to the transactions now in issue, the Directorate indicated that "subsection 248(5) contemplates rules of interpretation which establish the scope of the concept of substituted property for purposes of the Act" – i.e., rather than merely being a deeming provision, s. 248(5) codifies the concept of substituted property for purposes of the Act?

Neal Armstrong.  Summary of 25 September 2013 Memorandum 2013-0476311I7 F ("93(2), 93(2.01) - Share substituted") under s. 93(2.01).

Where the earnings of a foreign affiliate are computed for surplus purposes on Canadian principles, new Reg. 5907(2.03) now requires that all available deductions be claimed.  This is a problem for offshore metal streams transactions.  In order to avoid local taxation on a deposit received under a long-term contract for the sale of the metal to be produced at a mine, a foreign affiliate in, say, the Caymans would be interposed, so that it rather than the local mining foreign affiliate receives the  deposit.  The Caymans affiliate now is required to claim the s. 20(1)(m) reserve respecting the deposit, so that it does not have exempt earnings to be distributed to Canco to be reinvested in the local mining project.

Neal Armstrong.  Summary of Michael W. Colborne, "Regulation 5907(2.03) and Offshore Metal Streams", Resource Sector Taxation, Volume IX, No. 2, 2013, p. 647  under Reg. 5907(2.03).

CRA has a policy of administrative tolerance to not assess interest and penalties where an HST registrant which is exclusively engaged in commercial activities neglects to self-assess itself for HST on a real estate purchase and claim the off-setting input tax credit.  CRA has now confirmed that it generally will follow the same approach where the ITC claim has become statute-barred.

Neal Armstrong.  Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 31. (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx) under ETA – s. 228(4).