News of Note
River Hills Ranch - Tax Court considers the "factual matrix" surrounding a termination contract to recharacterize an apparent business receipt as a capital receipt
Email this ContentA pharmaceutical company agreed to pay a number of farming corporations in order to cancel contracts for the collection of pregnant mare urine ("PMU"). The agreements characterized 80% of the payments as being for "feed and herd health expenses," which the Minister took to mean payments to cover operating expenses.
Hogan J found that the parol evidence rule did not prevent him from finding that the payments were really to compensate the taxpayers for the destruction of their PMU businesses, and hence capital receipts, and had been dressed up as "feed and herd health expenses" because of pressure from animal rights groups. A contract must be interpreted "with regard to the objective evidence of the factual matrix underlying the negotiation of the contract."
He did not discuss how the capital receipts should be treated. Although Pe Ben suggests the proceeds might receive capital gains treatment, this was before the eligible capital amount definition was amended to make it completely circular, as discussed in a previous post on Mertrux.
Scott Armstrong. Summary of River Hills Ranch Ltd v. The Queen, 2013 TCC 248, under s. 9 - Compensation Payments and General Concepts - Evidence.
Income Tax Severed Letters 14 August 2013
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Maplewood International REIT is launching as a cross-border income fund through converting a CPC
REITs increasingly have become listed through backdoor IPOs under which a TSXV-listed capital pool company with nominal capitalization is launched, then effectively converted to a listed micro-cap REIT under a Plan of Arrangement (see BLF REIT), with a view to bulking up later through subsequent acquisitions and unit issuances (see Northwest International REIT).
The proposed conversion of Holland Global Capital into Maplewood International REIT, whose first (indirectly held) property will be in the Netherlands, demonstrates that essentially the same backdoor technique can be used to create a cross-border income fund from the very first property acquisition.
Maplewood International REIT will not be a REIT for Canadian tax purposes but, rather, an income fund which holds no Canadian real estate or other non-portfolio properties. Because of this non-Canadian structure, it is possible for the subsidiary Ontario LP of the REIT to offer to acquire the shares of individual Holland Global shareholders in consideration for exchangeable units under s. 97(2), without the need to worry that it thereby would not qualify as an excluded subsidiary entity. However, as in previous exchangeable structures which have been launched subsequently to the budget announcement of the character conversion rules, no tax opinion is provided to those who wish to exchange their shares of Holland Global for exchangeable units of the LP rather than on a taxable basis for units of the REIT.
Neal Armstrong. Summary of Circular for Conversion of Holland Global Capital into Maplewood International REIT under Mergers & Acquisitions - REIT and Income Fund Acquisitions - CPC Conversions.
Finance is considering a domestic anti-treaty shopping rule which overrides treaty benefits
Although it has issued a "consultation" paper, so that all reasonable alternatives are open for consideration, it is quite clear that Finance is contemplating adopting a domestic treaty override provision (i.e., an amendment to or under the Income Tax Act that in specified circumstances would override otherwise-effective treaty shopping). Finance considers that this could be done consistently with the OECD Commentaries, which indicate that countries do not have to grant treaty benefits for treaty abuses (i.e., Finance considers this would not be an "override" rule in the sense of blithely breaching Canada’s treaty obligations in the U.S. fashion).
Finance discusses various forms that the anti-treaty shopping rule could take. It seems to be somewhat partial to a rule which could (based on some CRA discretion) deny treaty benefits where the entity claiming the benefits is owned or controlled by 3rd county residents not all of whom are resident in treaty countries with equivalent relief, and the entity pays little or no tax and has no substantive business operations (other than managing investment income).
Neal Armstrong. Summary of 12 August 2013 Department of Finance Consultation Paper on Treaty Shopping – The Problem and Possible Solutions under Treaties – Art. 29A.
A $1 error in the amounts used in a suppression election can invalidate the election
Where 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.