News of Note
Finance will address application of FAD rules to transfers within Canadian groups of FA debt
Email this ContentA Canadian "Acquire Co" of CRIC (i.e., a Canadian subsidiary of a non-resident parent) purchased the Canadian "Target," and then amalgamated with it. Amalco then distributed shares and debt of "FA" (a U.S. sub previously held by Target) to CRIC.
A comfort letter contemplates unspecified amendments to the foreign affiliate dumping rules to address two problems:
- s. 212.3(18) does not exempt transfers of FA debt between related Canadian corporations
- the exemption in s. 212.3(18)(a) for transfers of FA shares between related Canadian corporations does not apply where the transferor dealt at arm’s length with the transferee at any time during the series of transactions – which is problematic here because Amalco is deemed by s. 212.3(22)(a) to be a continuation of Target
Neal Armstrong. Summary of 9 July 2013 Comfort Letter addressed to Brian Bloom of Davies under s. 212.3(18)(a).
The extent to which CRA can contradict the written terms of a non-sham agreement is still uncertain
A significant number of decisions suggest that the "parol evidence rule" (that "when the parties to an agreement have apparently set down all its terms in a document, extrinsic evidence is not admissible to add to, subtract from, vary or contradict those terms") does not apply to CRA, as (per Urichuk) "the Minister, not being a party to that agreement, is entitled to rely on any available evidence to support his characterization [thereof]." However, recent decisions (e.g., General Motors) may suggest a tendency to find that the terms of written agreements, in the absence of a finding of sham, should not be contradicted by extrinsic evidence. See Contradiction of written contracts or other documents (parol evidence rule).
There also is a U.S. dichotomy. The U.S. Tax Court has stated that it is "is well settled that the parol evidence rule has no application in Federal tax cases where the Government is not a party or privy to a party to the instrument." However, the US Court of Appeals for the Third Circuit established the "Danielson rule," that "a party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc."
Neal Armstrong. Summary of Amir Pichhadze, "Can, and Should, the Parol Evidence Rule Be Invoked by or against the Canadian Tax Authorities in Tax Litigation? Lessons from US Jurisprudence", Bulletin for International Taxation, September 2013, p. 474, under General Concepts – Evidence.
CRA publishes granular illustrations of what constitutes SR&ED
Ten draft examples published by CRA on the application of its SR&ED Investment Tax Credits Policy include illustrations of the distinctions between: solving technical problems and resolving technological uncertainty; mere cost-cutting and doing so through resolution of technological uncertainty; trial-and-error techniques and systematic research; and new products and technological innovation.
In addition to the question of what is scientific research and experimental development, the examples address the distinction between eligible support work and excluded work, and carving out SR&ED from a larger company project.
Scott Armstrong. Summary of 18 September 2013 Draft examples to illustrate key concepts in the Eligibility of Work for SR&ED Investment Tax Credits Policy under s. 248(1) - scientific research & experimental development.
The Slate U.S. Opportunity (No. 3) Realty Trust offering provides a quarterly redemption right
The Slate U.S. Opportunity (No. 3) Realty Trust offering is virtually identical to that for No. 2.
The Trust proposes to invest in US real estate through an Ontario "holding company" LP and a Delaware "grandchild" subsidiary LP, both of which will elect to be corporations for US purposes. The offered units will not be listed until sometime (potentially up to almost six years) after closing of the offering (or never, if within that period the assets first are sold and the Trust liquidated).
The units can be retracted at any time. If a retraction occurs before a listing, the unitholder receives the redemption proceeds, calculated as 95% of the NAV at the end of the quarter preceding the retraction date, in the form of cash or a vaguely-described in specie distribution, by the end of the month following the quarter in which the retraction occurred. If the retraction occurs after a listing, the redemption proceeds are based on the lesser of the units’ closing market price on the retraction date and 95% of their 10-day VWAP following the retraction date.
Neal Armstrong. Summary of (final) prospectus for Slate U.S. Opportunity (No.3) Realty Trust offering under REIT and LP Offerings - Foreign Asset Income Funds and LPs.
A Guatemalan tax on revenues qualified as an income tax because the taxpayer could elect instead to pay tax on net income
A Guatemalan tax calculated as around 6% of gross revenue qualified as an "income or profits tax" because it was imposed pursuant to an income tax statute which gave the taxpayer an option each year of paying tax instead on its net income – so that effectively the income of the taxpayer placed a cap on how much it could be required to pay as revenue tax.
However, if a foreign affiliate elected to pay tax on the revenue basis, it would be required for surplus purposes to compute its earning for that year under Canadian income tax rules rather than using the Guatemalan income tax law.
Neal Armstrong. Summaries of 5 September 2013 T.I. 2011-0431031E5 under ss. 95(1) - foreign accrual tax, 126(7) – business income tax, and Reg. 5907(1) – earnings.
Envision - Supreme Court of Canada finds that a continuation-style amalgamation will always satisfy the ss. 87(1)(a) and (b) conditions
A B.C. statute (which was interpreted as providing for continuation-style amalgamations notwithstanding somewhat non-standard language) was found to have the effect of deeming all property (and liabilities) of the predecessors to have become property (and liabilities) of Amalco, as required in s. 87(1). Accordingly, an attempt to generate a "bad" (non- s. 87) amalgamation, by purporting to agree that some predecessor property did not become Amalco property, was unsuccessful.
Rather than talking about two rivers flowing together, the favoured metaphor of Rothstein J. was of the two predecessors ceasing to have separate legal personalities, but continuing "inside" Amalco. The judgment appears to accept that the amalgamation agreement can specify the precise effective time of the amalgamation where the corporate statute does not do so.
Neal Armstrong. Summary of Envision Credit Union v. The Queen, 2013 SCC 48, under s. 87(1).
CRA indicates that extracting exempt surplus through cash dividends rather than a s. 93 election in a sale scenario may be GAARable
An arm’s length shareholder (NR1) of a 2nd-tier foreign affiliate of Canco (Cco) purchased an asset from Cco, with Cco then paying a dividend on one of its classes of shares (namely, Class D shares) held by the 1st-tier foreign affiliate of Canco (Bco) and with NR1 waiving its right to the dividend on its Class D shares. Cco then redeemed the Class D shares of Bco at a loss to Bco. There was a further indirect sale transaction that looked even more peculiar.
The Rulings Directorate noted that if (1) Bco was able to access more exempt surplus through the payment of dividends by Cco rather than by selling the shares and using the s. 93(1) election, and (2) its shares of Cco were not excluded property, so that accessing more exempt surplus meant reducing the recognition of foreign accural property income to Canco by reducing a taxable gain which would have been recognized by Bco on the direct sale scenario, then the auditor should consider the application of the general anti-avoidance rule.
Neal Armstrong. Summary of 10 September 2013 Memorandum 2010-0387631I7 under Reg. 5902(1).
CRA finds that the Treaty exclusion for participating interest applies to oil-index linked interest paid by a Canadian oil exploration company to a U.S. resident even though it owns no oil
Although interest paid paid by a Canadian resident to a U.S. resident normally is exempt from withholding tax, Art. XI, para. 6(b) of the Treaty provides that the exemption does not apply where the interest "is determined with reference to…any change in the value of any property of the debtor." CRA has found that this exclusion applies to interest paid by a Canadian exploration company with valuable oil and gas properties, where the interest is computed by reference to a public index tracking the price of oil and gas, even though it does not have any oil or gas inventory.
Neal Armstrong. Summary of 26 August 2013 Memorandum 2013-0494211I7 under Treaties – Art. 11.
Income Tax Severed Letters 25 September 2013
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Acquisition of control on a single-wing butterfly helps address RDTOH circularity issue
Where the distributing corporation (DC) in a butterfly is a Canadian-controlled private corporation which earns investment income and has refundable dividend tax on hand, a circularity complication arises, relating to the fact that that the butterfly mechanics entail a cross-redemption of shares between DC and the transferee corporation (TC), resulting in each receiving a deemed dividend from the other: (1) the deemed dividend paid by DC generates a dividend refund to it which, in turn, generates Part IV tax to TC under s. 186(1)(b), thereby generating RDTOH to TC; (2) this RDTOH of TC means that it generates a dividend refund on the deemed dividend paid by it to DC; which (3) generates Part IV tax and an increase to the RDTOH account of DC, thereby increasing its dividend refund in step 1; and so on until following the reaching by at least one of them of the 1/3 dividend refund limit in s. 129(1)(a)(i) – which could produce asymmetrical results if the paid-up capital of the cross-shareholdings differs.
A single-wing butterfly conveniently (from the standpoint of this circularity issue) resulted in an acquisition of control of DC by its remaining shareholder when the common shares in DC of TC were redeemed. This meant that DC had a deemed year end immediately before the cross redemptions started (as no s. 256(9) election was made). This, in turn, meant that DC (which had sufficient safe income on hand vis-à-vis both shareholders) could flush out its existing RDTOH account in its pre-butterfly taxation year through s. 84(1) deemed dividends.
This was not a complete solution, as DC and TC could still earn investment income post-butterfly (and TC still had a full taxation year, so that its "flush out" RDTOH could bounce back to DC in DC's second taxation year). However, rather than transferring the pro rata portion of its properties to TC directly, DC made this transfer to a sub of TC, so that it received a deemed dividend on a subsequent share redemption by the sub (which was immediately wound up into TC, and did not generate any RDTOH) rather than receiving a deemed dividend from TC. This eliminated circularity issues for DC's 2nd taxation year as well.
Neal Armstrong. Summary of 2013 Ruling 2012-0449611R3 under s. 55(1) – distribution. See also Michael N. Kandev and Alan Shragie, "RDTOH on Butterfly", Canadian Tax Highlights, Volume 16, Number 11, November 2008, p. 2.