News of Note
Capital BLF Inc. provides meager rollover option on REIT conversion transaction
Email this ContentCapital BLF Inc., a small public real estate company, is converting into a REIT under a CBCA plan of arrangement. Qualifying shareholders are given the option of transferring their shares on a rollover basis for exchangeable units of a subsidiary LP rather than on a taxable basis for REIT units. Individuals do not so qualify, as the subsidiary LP must be an "excluded subsidiary entity" for SIFT purposes.
No tax disclosure is provided to those choosing the rollover option, perhaps reflecting uncertainty on the scope of the new character conversion (or synthetic disposition) rules.
Neal Armstrong. Summary of Capital BLF Inc. Circular under CPC Conversion.
Choice Properties REIT offering will segregate partner debt in a separate trust
Although at common law it may not be possible for a partner to also be a partnership lender (so that such debt effectively is recharacterized as partnership equity), CRA on one occasion considered that this potential recharacterization may be overridden in Ontario under the Limited Partnerships Act (Ontario) (see 17 March 2003 T.I. 2001-009567).
When the prospectus for the Choice Properties REIT offering (discussed in a previous post) was finalized, two preliminary steps were added so that $2 billion of notes owing by the master subsidiary Ontario LP will be held by an intermediate subsidiary unit trust rather than directly by the Loblaw-group limited partners.
Neal Armstrong. Summary of Choice Properties REIT prospectus under Offerings - REIT and LP Offerings - Domestic REITs.
CRA (reluctantly?) confirms that a subsidiary LP is transparent for purposes of the closed-end fund rules
A listed open-end mutual fund trust is converting to a closed-end (s. 108(2)(b)) fund in order that it can issue non-retractable preferred units to the public.
Notes owing to the fund by a subsidiary trust holding an office tower would exceed the 10% debt limit in s. 108(2)(b)(v). Accordingly, the office tower will be acquired, and the notes assumed, by a subsidiary LP, with the notes then being converted to partnership equity.
CRA gave opinions (rather than rulings – perhaps suggesting queasiness) that the subsidiary LP (whose units would be problematic if treated as securities or non-marketable securities in their own right) would be viewed as a look-through for purposes of the closed-end numerical tests – so that the fix described above "works."
Neal Armstrong. Summaries of 2012 Ruling 2011-0410181R3 under ss. 108(2)(b), 104(7.1) and 248(1) - disposition. See also 17 March 2003 T.I. 2001-009567.
LLCs owned by US-resident individuals are not entitled to the 5% branch profits rate
CRA also has published its response at the 2010 annual CTF conference indicating that the branch tax reduction under X(6) of the Canada-US Tax Convention is not available to an LLC that is wholly-owned by US-resident individuals.
Neal Armstrong. Summary of 28 November 2010 Annual CTF Round Table, Q. 17, 2010-0386391C6 under Treaties – Art. 10 (see also summary of 23 October 2012 T.I. 2012-0440101E5).
CRA publishes its position on tracing interest payments, made to a non-qualifying US parent, to earnings of a connected business
Interest paid by Canco to its US parent (USco) will qualify for Treaty benefits (i.e., no withholding tax), even if USco is not a qualifying person, if that interest is derived by USco "in connection with or incidental to" a (non-investment management) trade or business of USco that is "substantial in relation to the activity carried on in [Canada] giving rise to that income." CRA has published its response at the 2010 annual Canadian Tax Foundation conference indicating that, in the scenario where the cross-border debt was incurred by Canco to fund both a connected and non-connected business, Canco will be required to establish that the interest payments are funded out of the earnings of the connected business in order to avoid withholding.
Neal Armstrong. Summary of 28 November 2010 Annual CTF Round Table, Q. 12, 2010-0387001C6 under Treaties – Art. XXIX A.
Income Tax Severed Letters 10 July 2013
This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA continues to require land subdivision developers to pro-rate interest expenses on a lot-by-lot basis
Subject to a somewhat minimal "base level deduction," land developers are required under s. 18(2) to capitalize development-related interest expenses except to the extent of their related gross revenues. CRA has confirmed a position adopted over 20 years ago (see 89 C.M.TC - Q.13 and 91 C.R. - Q.39) that interest expense is effectively required to be allocated for these purposes among the lots in a land subdivision, so that if only 1/3 of the lots are sold in the first post-subdivision year, around 2/3 of its interest expense for that year will still be non-deductible.
Neal Armstrong. Summary of 20 February 2013 T.I. 2012-0469811E5 F under s. 18(2).
Dependent agent PE – Das ist klar, nicht wahr?
Lee Sheppard has summarized some interesting discussions at a June 2013 conference in Vienna on the dependent agent branch of the permanent establishment definition (Art. 5(5) of the OECD model convention). Among the debates were:
- whether the concept of "habitually" was satisfied when the taxpayer’s agent negotiated a single contract;
- whether "synthetic commissionaire" planning could work in a common law jurisdiction (a British government official differed with the tentative affirmative view of a British tax lawyer); and
- whether an "agent" who lacks the ability to bind its principal is exempted under the independent agent paragraph (which also was discussed).
Neal Armstrong. Summary of Lee A. Sheppard , "The Brave New World of the Dependent Agent PE," Tax Notes International, Vol. 71, No. 1, 1 July 2013, p. 10 under Treaties - Art. 5.
CRA claims that it will read each Reportable Transaction form
CRA has released the prescribed form for reporting "reportable transactions" (avoidance transactions with specified markers).
Bill C-48 provided that reporting in respect of transactions for 2011 and 2012 is due on October 24, 2013 (i.e., 120 days after royal assent), rather than on June 30 of 2012 or 2013, as the case may be. The last page of the form acknowledges the 120 day extension for 2011 transactions, but not for 2012 transactions. I understand from my partner Chris Anderson that CRA has been notified of this error.
The form also states that "each return will undergo a preliminary review."
Neal Armstrong. Link to RC312 Reportable Transaction Information Return (2010 and later tax years) under s. 237.3(2).
Dissolve – and turf everything two years later?
S. 230(4) provides that important corporate records (minute books, G.L. and key agreements) must be retained until two years following dissolution, whereas the less important stuff can be turfed (prudence aside) after 6 years. CRA considers that, under the somewhat odd-looking rule in Reg. 5800(1)(b), once the corporation is dissolved all the records on hand must be retained for a further flat two years.
This interpretation is reminiscent of a conversation with a retired senior CRA official, who indicated that CRA’s policy was for audits (presumably outside the context of a voluntary disclosure) to not go back more than 6 years even where misrepresentation was suspected.
Neal Armstrong. Summary of 14 June 2013 T.I. 2012-0461301E5 F under Reg. 5800(1).