News of Note
CRA accepts that no nominee agreement is required if the facts are obvious
Email this ContentTitle to daughter’s home was acquired in her mother’s name due to lender requirements, but daughter made all the mortgage payments. CRA accepted that daughter was the beneficial owner notwithstanding the absence of a nominee agreement or bare trustee declaration. See also Fourney and Peragine.
Neal Armstrong. Summary of 22 November 2013 T.I. 2013-0511771E5 under s. 104(1).
Angle Energy – Bellatrix merger contemplates unilateral s. 85 elections
Angle Energy shareholders have sold their share to Bellatrix for cash or Bellatrix shares (but with the overall cash/share split fixed at 22%/78%), followed by an amalgamation of Bellatrix, Angle and an Angle subsidiary (ARI). The first step under the plan of arrangement was the s. 98(3) winding-up of a partnership between Angle and ARI.
Angle shareholders who wish to elect under s. 85(1) or (2) will be able to download "pre-signed" election forms from the Bellatrix website. Presumably Bellatrix will have no way of monitoring whom it has "jointly" elected with, in which case it may not be able to correctly compute the cost of its Angle shares or the PUC limit for the shares issued by it.
Neal Armstrong. Summary of Joint Circular of Angle Energy and Bellatrix Exploration under Mergers & Acquisitions – Mergers – Shares for Shares or Cash.
CRA finds that the provision of paid support services by a charity to a joint venture corporation would be a bad business
A charitable corporation proposed that it and a taxable Canadian corporation would transfer assets including goodwill to a jointly owned CBCA corporation (Newco) in consideration for shares, with Newco apparently to carry on a business with the transferred assets and transferred employees. CRA ruled that the holding of this Newco investment and the performance of broad oversight would not in itself be a business which was not a related business (which would have been a bad thing). However, the Rulings Directorate consulted with the Charities Directorate who, among other concerns, considered that the provision of support services by the Charity to Newco (for fees equal to the greater of the services’ cost and fair market value) would be an unrelated business.
Neal Armstrong. Summary of 2012 Ruling 2011-0431051R3 under s. 149.1(2)(a).
Delavaco has decided to go public as a public company rather than a REIT or LP
Delavaco, which is a privately-held Ontario corporation holding US single-family rental homes through Delaware partnerships, will be going public by merging into a small capital pool company (Sereno) under a triangular amalgamation with a Sereno subsidiary, so that Delavaco shareholders will receive approximately 99% of the shares of Sereno (whose name will be changed to Delavaco Residential Properties Inc.)
This transaction represents a change of heart from May 2013, when Sereno and Delavaco entered into a letter of intent for the acquisition by Sereno of all the Delavaco shares pursuant to a plan of arrangement, and for Sereno’s subsequent conversion into a REIT.
It likely would be advantageous for the new public entity to be a flow-through entity for Canadian and US purposes if the US operations could also be held in a US private REIT (see American Hotel and Granite). However, such a structure might restrict options for disposing of the homes (and some have occurred already in Delavaco’s short life). A US private REIT is subject to a 100% tax on any net income derived from the sale or other disposition of "dealer property" (other than foreclosure property), i.e., real estate held by the taxpayer primarily for sale to customers in the ordinary course of business.
Neal Armstrong and Abe Leitner. Summary of Joint Delavaco and Sereno Circular under Mergers & Acquisitions – Amalgamations - Triangular Amalgamations.
CRA accepts a post-closing receipt by Buyco, to reduce the share purchase price, as a reduction in its share cost
Where, following a sale of Opco by Sellco to Buyco, CRA reassesses Opco to increase its income for a pre-closing taxation year, the resulting tax liability of Opco will reduce the safe income on hand attributable to the Opco shares of Buyco. This will be the case irrespective of whether there is a price adjustment clause to the selling price which requires Sellco to make a corresponding payment to Buyco – although in such event there will be a reduction to the cost of the Opco shares to Buyco.
Neal Armstrong. Summary of 11 October 2013 APFF Round Table, Q. 18, 2013-0495851C6 F under s. 55(2).
Income Tax Severed Letters 11 December 2013
This morning's release of 9 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Transalta - Federal Court of Appeal states that CRA is bound to assess in accordance with its applicable IT Bulletin
Before achieving complete success at trial, the taxpayer made a settlement offer on the basis that some cash bonuses paid by some subsidiaries were non-deductible, but all the other (share and cash) bonuses at issue were fully deductible. In finding that the rejection of this offer did not give rise to Crown responsibility for post-settlement costs of the taxpayer, Blais CJ found that there was no principled basis on which the Minister could have accepted the offer. In what arguably is an extension of this Galway principle, he further stated that the Minister was obliged to assess in accordance with his view of the law set out in the applicable Bulletin (IT-113R4).
Neal Armstrong. Summary of Transalta Corporation v. The Queen, 2013 FCA 285 under s. 152(1).
Kossow - Federal Court of Appeal confirms that a 3rd-party collateral benefit will vitiate a "gift"
V.A. Miller J's decision to strike down another leveraged charitable gift transaction has been affirmed. The financing of 80% of the gifts in question with a non-interest-bearing loan with a term of 25 years was itself a sufficient collateral benefit for the "gifts" not to qualify as such for tax purposes. Taxpayer's counsel unsuccessfully argued that McNamee v. McNamee, 2011 ONCA 533, established that a gift is only vitiated by the donor's receipt of a benefit if the donee (rather than a third party - here the lender) provided it.
Neal Armstrong. Summary of Kossow v. The Queen, 2013 FCA 283 under s. 118.1(1) - "total charitable gifts."
Wine is more refined than cheese
CRA considers that a farmer may carry on activities (such as the aging of cheese or plucking of chickens) that, if carried on by another, would constitute the processing of farm products rather than farming. However, where a wine producer also grows its grapes, the barrels used by it in fermenting the wines generally will be considered for class 29 purposes to be property used in the manufacturing or processing of goods rather than in farming.
Neal Armstrong. Summary of 19 November 2013 T.I. 2013-0510351E5 under Reg. 1104(9)(a).
CRA may require the dismantling of an exchangeable unit structure on conversion of a REIT to a closed-end fund
Similarly 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).