News of Note
Inter Pipeline management get rollover treatment on their $340 million consideration for agreeing to internalize management
Email this ContentInter 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).
Income Tax Severed Letters 31 July 2013
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Character conversion rules are not a big deal for the new Horizons stock index ETFs
As mentioned in a post on a previous Horizons offering, the character conversion rules in the March 2013 budget effectively eliminate the ability of mutual funds to transmute income account gains into capital gains using forward contracts.
Two new Horizons ETFs, based on the S&P/TSX Capped Energy and Financials Indices, will track their respective Index by entering into total return swaps with Canadian banks. Although realization under these swaps would be on income account, the disclosure effectively indicates that this is not a concern as settlement of the swaps will only occur to the extent necessary to fund redemptions – and the unitholders, other than perhaps investment dealers (who aren't bothered by income account treatment), generally will only trade their units on the TSX rather than redeeming them.
Neal Armstrong. Summary of Preliminary Prospectus for Horizons Stock Index ETFs under Offerings - Forward Sale/TRS Funds.
Those exercising Kingsway rights must accept a share ownership restriction for preserving US$827 million in losses
In order to try to preserve U.S.$150 million in U.S. net operating losses, in October 2010 Kingsway Financial Services adopted a modified version of a shareholder rights plan - so that a shareholder who acquired 5% or more of its shares without Board permission would have the value of those shares cut almost in half through a dilutive issuance of shares to the other shareholders. This attempted to forestall triggering the loss restriction rule in Code s. 382, which could occur if the percentage of shares held by large (over 5%) shareholders increased by more than 50% at any point over a three-year rolling testing period.
The different approach taken here to discouraging ownership changes is consistent with the viewpoint which questions the effectiveness of conventional non-resident ownership restriction clauses in the declarations of trust of Canadian domestic income funds and REITs, which purport to give an expropriation right to the board of trustees.
A recent Kingsway rights offering for common shares and two series of long-term tradable warrants notes that Kingsway’s U.S. NOLs have increased to US$827.4 million; and warns those exercising the rights to not exceed the 5% limitation without Board approval.
Notwithstanding that the warrants are well out of the money, Kingsway states its view that over 10% of the subscription price to exercise the rights is allocable to the warrants. Under new s. 49(2), it no longer is potentially costly for the issuer to admit that warrants such as these are valuable.
Neal Armstrong and Abe Leitner. Summary of Rights Offering Circular of Kingsway Financial Services under Offerings - Rights Offerings, and of Circular for Plan of Kingsway Financial for Restricting Share Ownership Changes under Other - Share Ownership Restrictions.
CRA confirms that expansions of non-residential buildings can qualify for enhanced CCA irrespective of their size
Canadian non-residential buildings acquired after the 2007 Budget date generally are eligible for enhanced capital cost allowance rates. CRA has confirmed that where a post-2007 addition is made to a non-residential building which itself does not qualify for the enhanced CCA (e.g., because a timely election was not made), the cost of the addition generally will qualify for the enhanced CCA irrespective of the quantum of the building expansion (provided that a timely election is made for the year of the addition). This is based on Reg. 1102(24), which deems "an addition to or an alteration of" the building to be a separate building.
This interpretation would have been more interesting if there instead were substantial repairs to the building without any area expansion.
Neal Armstrong. Summary of 10 June 2013 T.I. 2013-0489101E5 F under Reg. 1101(5b.1).
A sale of holding company shares is off-side CRA’s policy on earn-outs.
In IT-426R, CRA refers to earn-out clauses in share sale agreements where "the quantum of proceeds is determined by reference to future earnings generated by the underlying assets of the corporation," and it lists as one of the conditions, for the vendor being permitted to use the cost recovery method, that it is reasonable to assume that the earnout feature relates to "underlying goodwill."
CRA has indicated that the cost recovery method is not available where an individual sells, on an earnout basis, the shares of a holding company (Aco) whose only asset is shares of an Opco (Bco), because "the earnout clause is not tied to future amounts generated by underlying properties utilized in the course of a business carried on by Aco but rather to properties held by Bco."
Although ridiculous, this position may not be so bad. Stating that there is no relevant "underlying" property effectively is an acknowledgement that s. 12(1)(g) does not apply, and the future contingent amounts might be substantially discounted.
Neal Armstrong. Summary of 14 May 2013 T.I. 2013-0480561E5 F under s. 12(1)(g).
Burlington Resources - Tax Court accepts that it is "legitimate to ask" whether an NSULC should pay for a parent guarantee
The Minister challenged, under s. 247, the deduction by an NSULC of guarantee fees paid to its US parent (BRI). In response to a challenge of the Minister's relevant pleading, Hogan J stated that "it is legitimate to ask whether an arm's length person standing in the appellant's shoes would have been willing to pay the guarantee fees ... knowing that BRI was potentially responsible for the appellant's liabilities even without the guarantee."
Scott Armstrong. Summary of Burlington Resources Finance Company v. The Queen, 2013 TCC 231, under s. 247(2).