News of Note
A $1 error in the amounts used in a suppression election can invalidate the election
Email this ContentWhere the winding-up under s. 88(3) of a foreign subsidiary of Canco would otherwise result in a capital gain to Canco (e.g., because of high inside basis of the distributed assets and insufficient exempt surplus), Canco can make a suppression election under s. 88(3.3) to in effect reduce the high basis of the distributed assets and, thus, the proceeds of disposition of its shares of the subsidiary. However, the amount of this reduction cannot exceed what otherwise would be the capital gain on Canco’s disposition of its shares of the subsidiary – otherwise the election is completely invalidated.
Accordingly, if Canco makes the suppression election on the basis of estimated proceeds of disposition of its shares of the subsidiary (based on the inside basis) that later turns out to have been too high or on the basis of an estimated adjusted cost base of its shares of the subsidiary that is too low, the election will be invalidated.
Neal Armstrong. Summary of Clara Pham and Alex Feness, "CFA Suppression Election: Potential Risks", Canadian Tax Focus, Vol. 3, No. 3, August 2013, p. 2 under s. 88(3.4).
Inter-Leasing - Ontario Superior Court suggests that pure holding companies earn business income - and that avoidance of a charging provision is inherently abusive
A scheme for reducing the provincial income taxes of a Canadian public company group involved group companies paying deductible interest (via an intermediate company) to a British Virgin Islands affiliate ("Inter-Leasing"), with such interest being excluded from the taxable income earned in Canada of Inter-Leasing for Ontario purposes on the basis that it was property income. Aston J (a family-law expert) found that this interest instead was income from a business carried on in Canada (and therefore taxable in Ontario) notwithstanding that essentially the only activities of Inter-Leasing were to acquire and hold four intercompany loans. His reasoning might be reduced to the following syllogism:
- the core activities of a corporation are a business;
- the core activity of a pure holding company is earning investment income;
- therefore, the investment income of a pure holding company is income from a business.
He further stated that "charging provisions [whose] object and purpose is to raise revenue" are "different from a provision creating a deduction or exemption when it comes to a GAAR analysis," so that transactions, such as these, which sought to avoid a charging provision, thus were abusive under the Ontario equivalent of s. 245(4) as being contrary to this revenue-raising object.
Neal Armstrong. Summaries of Inter-Leasing, Inc. v. Ontario (Revenue), 2013 ONSC 2927 under s. 115(1)(a)(ii) and s. 245(4).
Bagtech - Federal Court of Appeal finds that voting restrictions in a shareholder agreement are relevant to de jure control if any clause in the agreement qualifies it as a USA
A unanimous shareholder agreement for a corporation which was majority-owned by non-residents restricted the voting rights of the non-residents, so that the resident shareholders were entitled to elect a majority of the board.
The Crown unsuccessfully argued that, as a USA is defined as an agreement that restricts the powers of the directors (rather than the voting rights of the majority shareholders), these voting restrictions should be ignored. Gauthier JA effectively indicated that once an agreement qualifies as a USA by virtue of containing any restriction on the directors' powers, any voting restriction contained elsewhere in the agreement can be taken into account for de jure control purposes. Therefore, the corporation qualified as a Canadian-controlled private corporation.
Neal Armstrong. Summary of Price Waterhouse Cooper, Trustee in Bankruptcy of Bioartificial Gel Technologies (Bagtech) v. The Queen, 2013 FCA 164 under s. 125(7) - Canadian-controlled private corporation.
Income Tax Severed Letters 7 August 2013
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Clearwater Seafoods - Federal Court of Appeal finds that the successor to a terminated trust could continue its tax appeal
When a taxpayer ceases to exist, its tax appeal is extinguished, right?
Sharlow JA effectively found that when the subsidiary trust of an income fund was wound-up as part of the income-fund conversion procedures contemplated in s. 88.1, the public company which received all its property could continue a tax appeal of the former trust, provided that some routine facts were confirmed at the Tax Court level.
Neal Armstrong. Summary of Clearwater Seafoods Holdings Trust v. The Queen, 2013 FCA 180, under s. 169.
Alamos consideration for Esperanza acquisition includes warrant sweetener
In the acquisition of Esperanza by a Newco subsidiary of Alamos under a B.C. plan of arrangement, the shareholders of Esperanza are receiving out-of-the-money warrants on shares of Alamos in addition to cash. (For another warrant consideration example, see Coeur d'Alene offer.) The U.S. tax disclosure indicates that future adjustments to the number of Alamos shares to be issued on the exercise of the Alamos warrants, or to the warrants’ exercise price, could be treated as a constructive distribution to a U.S. holder of the Alamos warrants to the extent that such adjustments have the effect of increasing the holder’s proportionate interest in the "earnings and profits" or assets of Alamos.
Esperanza is a PFIC, presumably because of the cash needs of its exploration program – a common problem in the resource sector.
Neal Armstrong and Abe Leitner. Summary of Esperanza Circular re acquisition by Alamos under Mergers – Shares for Cash and Warrants.
Inter Pipeline management get rollover treatment on their $340 million consideration for agreeing to internalize management
Inter Pipeline, which is a TSX-listed LP, is being converted into a public company under an Alberta Plan of Arrangement. The Plan entails the public transferring their units to a holding company for the GP, with the partnership being wound-up under s. 98(5) by virtue of the holding company then transferring those units to the GP.
Up until June 2013, management owned the parent (PAC) of the GP. On June 1, the five managers sold PAC on a s. 85 rollover basis to a company controlled by the independent GP director in exchange for preferred shares with a redemption amount of $340 million or $240 million, depending on whether some projects come into production by 2017. On the amalgamation under the Plan of Arrangement resulting in the public company, management will receive common shares, and shares convertible into common shares, of the public company in exchange for their preferred shares – also on a rollover basis.
Neal Armstrong. Summary of Inter Pipeline Circular and Material Change Report under Other Public Transactions - LP Conversions.
Bandi - Tax Court finds that departures in a tax shelter, from what was described in the tax shelter number application, were not fatal
A "charitable donation" scheme in which the taxpayer participated had numerous and significant differences with what the promoter had described when it applied for the tax shelter identification number. CRA argued that this meant that the actual scheme did not have the benefit of having received the identification number, so that no credit could be claimed.
Hogan J rejected this "literal interpretation." He stated that s. 237.1(1) should not be interpreted as forcing a promoter to abandon the existing registration and reapply each time a change was made to the arrangement. There was no registration system or other process that would allow taxpayers to verify that a program conformed to the tax shelter description that the promoter filed with CRA.
However, the taxpayer lost his appeal anyway, on the basis that he had not made any "gift."
Scott Armstrong. Summaries of Bandi v. The Queen, 2013 TCC 230, under ss. 237.1(6) and 118.1 - "total charitable gifts."
CRA finds that "exclusive" use accommodates incidental other uses
In order for the gain from the sale by an NPO of a clubhouse to be exempt under s. 149(5)(e), that property must have been "used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by it for its members." CRA considers that the previous earning of hall rentals from non-members does not eliminate this exemption.
Neal Armstrong. Summary of 12 April 2013 T.I. 2012-0460901E5 under s. 149(5).
On a cashless stock option exercise, the stock option benefit is based on the shares’ value on the issuance date rather than the short sale date
Where a cashless exercise procedure is used for employee stock options, the broker short sells identical shares with a value at the time of the trade (as opposed to the time of settlement) equal to the exercise price, then on the settlement date the employer issues a portion of the exercised shares to the broker to cover the short sale, with the balance being issued to the employee. CRA considers that the stock option benefit (under s. 7(1)(a)), including for the shares used to cover the short sale, is to be measured on the basis of the fair market value of the shares at the time the shares are issued rather than the value for which the shares were previously sold short.
Neal Armstrong. Summary of 19 July 2013 2012-0458961E5 F under s. 7(1)(a).