News of Note
Multiple operating subsidiaries can preclude electing to avoid income treatment of non-compete proceeds
Email this ContentMr. X sells Holdco, holding all of Opco 1 and 2, in an arm’s length sale and grants a non-compete covenant respecting the businesses of Opco 1 and 2. The singular-includes-plural rule (I.A., s. 33(2); Rye) could be applied to the French version of s. 56.4 to conclude that Mr. X’s shares of Holdco qualify as deriving 90% or more of their fair market value from "a" corporation carrying on the business to which the non-compete relates – so that an election potentially could be made under s. 56.4(3)(c) to avoid income treatment of the portion of the sales proceeds allocated to the non-compete. However, the English version more emphatically states that Holdco must derive its fmv from "one other corporation." Without even referring to the English version, CRA concluded that the s. 56.4(3)(c) election was not available for this two-Opco reason. No policy discussion – we just read the words.
However, if there was an agreement with Buyco not to allocate anything to the non-compete, CRA considered that the exemption in s. 56.4(7) potentially would be available – without stipulating that it would be necessary for Holdco (whose goodwill under that provision is required to be preserved by the non-compete) to continue in existence in Buyco’s hands.
Although two relieving provisions in s. 56.4 effectively refer only to non-compete covenants, the giving of a non-solicitation covenant as well would not be problematic if it were sufficiently integrated with the non-compete.
If Holdco sold Opco 1 and 2, with Mr. X still granting the non-compete covenant to Buyco, the election in s. 56.4(3)(c) would not be available as "it is Mr. X, not Holdco, who provides the restrictive clause to Buyco."
Neal Armstrong. Summaries of 11 October 2013 APFF Roundtable Q.19, 2013-0495691C6 F under s. 56.4(3)(c) and s. 56.4(7)(f).
Goldcorp offer for Osisko does not include a s. 85 rollover alternative
Goldcorp is offering C$2.26 in cash and 0.146 Goldcorp common shares for each common share of Osisko Mining. No s. 85 election is offered.
It is unclear whether the disposition of Osisko shares for Goldcorp shares and cash may be treated as an exchange under a Code s. 368(a) reorganization given uncertainties as to whether any subsequent amalgamation will occur as part of an integrated transaction and the number of shares to be tendered to the offer.
Neal Armstrong. Summary of Goldcorp offer for Osisko under Mergers & Acquisitions – Unsolicted Bids (corporate).
CRA finds that an amalgamated corporation could not make an election to extend its predecessors’ year ends
Where a CCPC grants an option to a non-resident to acquire a controlling interest, so that it ceases to be a CCPC, s. 249(3.1) will deem it to have a year end immediately before that time. However, if this deemed year end occurs within what otherwise would have been the first seven days of its taxation year, it may elect under s. 249(3.1)(c) to extend the previous "normal" taxation year end to coincide with the deemed year end.
Not surprisingly, CRA considers that this election cannot operate where the status-changing event occurs in the first seven days of life of an amalgamated CCPC. Even if CRA had been receptive to the narrow interpretation of the s. 87(2)(a) "new corporation" rule suggested in Guaranty Properties and (to some extent) Pan Ocean, there likely would have been the same result.
Neal Armstrong. Summary of 28 November 2013 T.I. 2013-0504221E5 F under s. 249(3.1).
Income Tax Severed Letters 15 January 2014
This morning's release of 22 letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA will assess returns claiming tax shelter gifting credits without due dispatch
CRA is continuing its policy (first announced for the 2012 taxation year) of not processing returns of individuals claiming credits under gifting tax shelter until that tax shelter is audited - unless the claim is removed.
Neal Armstrong. Summary of 10 January 2014 CRA News Release under s. 237.1(1) - tax shelter.
CRA accommodates the s. 21 capitalization of losses that otherwise would disappear on a s. 107.4 trust merger
A ruling released on Wednesday morning respecting the conversion of a mutual fund corporation (which at one point had been an ordinary taxable Canadian corporation) into a mutual fund trust through the utilization of an in-house s. 132.2 merger, essentially represents an amendment of a previously issued ruling, discussed in a previous post. The amended ruling letter accommodates the elimination (through a further s. 107.4(3) transfer and s. 132.2 in-house merger) of a further subsidiary trust (Target) which had been acquired in the interim – as well as the elimination through the same techniques of a subtrust, in turn, of Target.
One point not mentioned in the previous post: a subsidiary LP of one of the subtrusts was to generate a loss which otherwise would have been extinguished, following its allocation to the subtrust, as a result of that subtrust being eliminated. The ruling letter accommodates the capitalization of that loss through a s. 21 election, so that there is a stepped-up cost amount in the buildings received by the new public mutual fund trust.
Neal Armstrong. Summaries of 2013 Ruling 2013-0488351R3 under s. 132.2 – qualifying merger and s. 21.
If your shareholders don’t know about this transaction, then they’re not part of the series?
Where a grandchild Canadian subsidiary (Cco) of Pubco (a non-resident public corporation deriving more than 10% of its fair market value from Cco) redeems pref shares held by another Canadian subsidiary, on a literal reading of s. 55(3)(a)(iii) the resulting deemed dividend could be converted into a capital gain under s. 55(2) if trading in the shares of Pubco occurred as part of the same series of transactions. In connection with getting a s. 55(3)(a) ruling, representations were made that there is no reason to believe that any Pubco shareholder is aware of these transactions (in addition to the ruling effectively being vitiated by a representation that none of the transactions described in s. 55(3)(a) would occur). Sounds fair: a meaningless ruling is given in exchange for a rep that could never be proven.
Neal Armstrong. Summary of 2013 Ruling 2013-0501811R3 under s. 55(3)(a).
Land and non-depreciable building are one property
Although in common tax parlance one refers to land and building as distinct properties, at common law the improvements to land such as buildings form part of the land. This often is not relevant as Reg. 1102(2) effectively deems depreciable property to be separate property from the land.
One place where this point is relevant is under Art. XIII, para. 9 of the Canada- U.S. Treaty, which potentially exempts part of the gain on the sale of real estate that has been held by a resident of the other country since before September 26, 1980. In the example of recreational land in a common-law province on which a personal-use cottage building is erected after that date, the land and improvements will be considered to be one property, so that the portion of a subsequent gain of the U.S.-resident owner which can be partially exempted can include gain attributable to the building. Also, only one s. 116 certificate would be required.
Neal Armstrong. Summary of 4 December 2013 Memo 2013-0489051I7 under Treaties – Art. 13.
U.S. citizens living in Canada generally should not have to pay any NIIT
To help fund "Obamacare," the U.S. is imposing the Net Investment Income Tax on 3.8% of a U.S. person's net investment income in excess of specified thresholds. However, U.S. citizens living in Canada generally should not be subject to the NIIT on the basis that (in Nightingale’s view) it should qualify as a social security tax.
If the NIIT is not a social security tax, there nonetheless is a good argument that the U.S. should allow a foreign tax credit to such individuals under the Canada- U.S. Treaty, as there is no evident intent for the NIIT legislation to override the Treaty.
Neal Armstrong. Summary of Kevyn Nightingale, "The Net Investment Income Tax: How it applies to U.S. Citizens Abroad", International Tax, No. 73, December 2013, p. 9 under Treaties – Art. 24.
CRA now is willing to accept conditional s. 184(3) elections
If a capital dividend paid by a corporation to its individual shareholder is disallowed by CRA (so that Part III tax is assessed), a dilemma arises: if a timely election under s. 184(3) is made to convert the dividend into a taxable dividend so as to eliminate the Part III tax, then that dividend cannot be converted back into a capital dividend if the objection to the Part III tax assessment ultimately is successful. Contrary to an earlier position, CRA now is prepared to hold the processing of the s. 184(3) election in abeyance, so that it will be treated as void if the taxpayer’s objection is successful, and treated as timely filed if the objection (or subsequent appeal) is dismissed.
Neal Armstrong. Summary of 4 December 2013 T.I. 2013-0504951E5 under s. 184(3).