News of Note
Coeur d’Alene uses cashless exercise warrants in acquisition of Orko Silver
Email this ContentA B.C. subsidiary of Coeur d’Alene is acquiring Orko Silver under a plan of arrangement for consideration including warrants to acquire Coeur d’Alene shares. As the issuance of shares on exercise of the warrants would not be exempt from registration requirements under the 1933 U.S. Securities Act, the warrants have a cashless exercise feature, i.e., the holder on "exercise" is issued Coeur d’Alene shares having a value equal to the in-the-money value of the warrants. As no exchangeable shares are offered, there will be no Canadian rollover.
Orko will then be merged under the plan of arrangement with the Coeur d’Alene subsidiary (now its parent), with Orko as the sole surviving corporation. CRA has ruled that this type of merger (i.e., with the subsidiary as the survivor) qualifies under s. 87 as a good amalgamation (2010-0355941R3).
Neal Armstrong. Summary of Orko Silver Circular under Cross-Border Acquisitions - Inbound – Other.
Melcor will defer capital gain on excess mortgage debt, on the formation of Melcor REIT, by having the REIT subsidiary LP issue tracking preferred LP units
Melcor will be transferring most of its rental properties to a new Canadian REIT (Melcor REIT) for consideration that includes exchangeable units of a subsidiary LP of the REIT and the assumption of a portion of its mortgage debt.
The assumption of all the mortgage debt would have triggered a capital gain to Melcor. Instead, Melcor is retaining a portion of the mortgage debt, and taking back Class C LP units from the subsidiary LP which will pay preferred distributions sufficient for it to service the retained debt, with the partnership providing a secured guarantee of the retained debt – and also indemnifying Melcor if Melcor’s deferred tax is triggered prematurely as a result of a sale of the related properties.
Neal Armstrong. Summary of Circular for IPO of Melcor REIT under Domestic REIT Offerings.
WPT Industrial REIT will use the Milestone dual-REIT structure
The IPO of WPT Industrial REIT contemplates that it will be a Canadian REIT and a U.S. corporation under the Code s. 7874 anti-inversion rules. However, it will elect to also be a U.S. REIT so as to avoid U.S. corporate income tax. Although there are a few commercial differences (e.g., U.S. dollar distributions, and a U.S. manager) this is essentially the same dual-REIT structure as in the Milestone Apartments REIT offering.
Neal Armstrong. Summary of WPT Industrial REIT offering under Cross-Border REITs.
Lipson - Ontario Court of Appeal finds that a CRA reassessment may not have commenced the limitations period for an allegedly negligent tax opinion
A law firm provided a tax opinion that was used to promote leveraged donations, which CRA disallowed. The plaintiff sought to certify a class action against the law firm.
The motion judge declined to certify on the basis that the applicable two-year limitations period had expired - as it started running in 2004 when CRA proposed to disallow the credits, so that the negligence action was barred when it was launched in 2009.
The Court of Appeal found that it was not clear that the limitations period had commenced in 2004. Notice of a "potential problem" with the taxpayers' claimed charitable tax credits was not knowledge of a negligence claim. There was potential merit in the plaintiff's allegation that they did not have that knowledge until two representative test cases were settled in 2008 in the Crown's favour.
Scott Armstrong. Summary of Lipson v. Cassels Brock & Blackwell LLP, 2013 ONCA 165, rev'g 2012 DTC 5013 [at 6604], 2011 ONSC 6724 under General Concepts - Negligence and Fiduciary Duty.
Site Announcement - Data Centre Outages
Our hosting provider's data centre had a power outage that took down Tax Interpretations for just over 12 hours. Service has been restored, but subsequent outages may occur before the source of the problem is properly addressed. We apologize for the inconvenience.
Update - the power problem has been resolved.
Income Tax Severed Letters 20 March 2013
This morning's release of 19 severed letters from the income tax rulings directorate is now available for your viewing.
CRA recharacterizes cross-border franchise payments
Among other payments, a Canadian franchisee paid "procurement licence fees" to a US-resident franchisor based on the volume of its purchases of products from third parties rather than the US franchisor. (In theory, the US franchisor was giving up the right to require the franchisee to purchase these goods from it at a mark-up.) CRA found that the field auditor could choose to recharacterize portions of this procurement fee as being applicable (based on "a valuation of the various rights") to withholding under ss. 212(1)(d)(i) and (ii) (non-copyrighted know-how and access to the franchisor's system) and (iv) (the exclusive aspects of the franchisor's system), while acknowledging that other elements such as payments for services generally would not be subject to withholding.
The results of this purported "valuation" exercise would essentially be indeterminate and highly sensitive to how CRA exercised its discretion. Analogous difficulties tend to be avoided in characterizing supplies of goods or services for HST/GST purposes through application of the single supply doctrine.
Neal Armstrong. Summary of 4 December 2012 Memorandum 2011-0431871I7 under s. 212(1)(d) and ss. 212(1)(d)(i), (ii), (iii), (iv), and (v).
CRA states that deductibility of legal fees incurred for reinstatement of employment must be determined on a retroactive basis, based on the result
CRA considered that legal fees incurred by a dismissed employee to be reinstated did not qualify for deduction under s. 8(1)(b) as being incurred to establish a right to unpaid remuneration until such time as such suit is successful - in which case the employee can file an amended return for the year in which the fees were incurred if that year is still open for reassessment. CRA's reasoning is that until the suit is successful, it cannot be known whether the employee will be reinstated and receive the award of remuneration owing, or the employee (if successful at all) will instead receive another award, for example, damages for wrongful dismissal, which would qualify as a retiring allowance rather than unpaid remuneration.
This approach may be inconsistent with general jurisprudential principles (and at least one of the decisions cited by CRA), which likely suggest that the focus should be on the purpose for incurring the legal fees rather than the result - so that if the thrust of the action is for reinstatement, rather than damages for wrongful dismissal, the fees should be currently deductible regardless of the outcome.
Neal Armstrong. Summary of 19 November 2012 Memorandum 2012-0433201I7 under s. 8(1)(b).
CRA maintains that s. 116 certificates are required for distributions to non-resident beneficiaries holding their capital interests as taxable Canadian property
CRA continues to maintain its long-standing policy that a non-resident beneficiary of an estate or trust whose capital interest is taxable Canadian property (e.g., where the trust held mostly Canadian real estate) is required to apply for a section 116 certificate before that interest is settled. This position is dubious insofar as it suggests that there is a potential liability of the trustees under s. 116(5), based on the "cost" of taxable Canadian property "acquired" by them. Trustees axiomatically do not hold beneficial interests in already-distributed trust property.
Neal Armstrong. Summary of 29 March 2012 T.I. 2010-0385771E5 under s. 116(1).
Ollenberger - Federal Court of Appeal finds that an "active business" need not be active
Valerie Miller J denied a business investment loss claimed by the taxpayer on a loan made to a Canadian-controlled private corporation which went bad, on the basis that the CCPC did not carry on its business in an "active" manner - so that its business did not qualify as an "active business" as required by the "small business corporation" definition.
In reversing her decision, Noël JA essentially found that this represented an improper departure from the "active business" definition in s. 248(1), which defines that term (outside the foreign affiliate context) to mean any business other than a specified investment business or a personal services business: there is no statutory requirement that an "active business" be active.
Scott Armstrong. Summary of Ollenberger v. The Queen, 2013 FCA 74 under s. 248(1) - "small business corporation."