News of Note
The Charger, AvenEx and Pace amalgamation will qualify as a tax-deferred exchange under Code s. 368(a).
Email this ContentThree oil and gas companies (Charger, AvenEx and Pace) amalgamated under a plan of arrangement. Rather than this occurring directly, there was an exchange under s. 85.1 of shares of two of the companies (Charger and AvenEx) for shares of the third (Pace), followed by the amalgamation. This qualifies as a tax-deferred exchange under Code s. 368(a).
Avoiding a single amalgamation avoided an acquisition of control of Pace that otherwise would have occurred under s. 256(7)(b) (and s. 256(7)(c) did not apply on the successive share-for-share exchanges).
As the last step, the stated capital of the shares of Amalco was reduced to a nominal amount, with such reduction added to contributed surplus (presumably with a view to the reduction being reversed later under s. 84(1)(c.3) if the occasion should arise.)
Neal Armstrong. Summary of Charger, AvenEx and Pace Circular under Amalgamations.
CRA does not permit cash management and return filing by a nominee to qualify it as a joint venture operator for GST/HST purposes
CRA has a long-standing published position that bare trustees or nominees cannot qualify as operators of joint ventures for purposes of the GST/HST joint venture election, even though it recognizes that it is common in the real estate industry to use nominee corporations in this way. CRA requires the operator to have the authority to manage the day-to-day activities of the joint venture without the input or approval of the joint venture participants, and states that this requirement would not be satisfied even where the nominee "manages the collection and remittance of the GST/HST, maintains the bank accounts in the nominee’s name, and receives all payments and pays all operational expenses on behalf of the joint venture."
Neal Armstrong. Summary of 26 November 2012 Interpretation 148931 under ETA - s. 273(1).
GST/HST Headquarters Letters November and December 2012
This afternoon's release of 15 HST/GST Headquarters Letters for November 2012 and 9 for December 2012 are now available for your viewing.
CRA applies upper tier debt on a pro rata basis for purposes of applying the 10% limitation rule in s. 55(3.1)(b)(i)(A)(II) respecting a cross-border butterfly
Where on a foreign spin-off by a non-resident public company (Foreign Pubco) of its shares of a non-resident subsidiary (Foreign Spinco), there has been a butterfly distribution of one of the two businesses in question by an indirect Canadian subsidiary (Canco) to a transferee corporation (TCo) that will be retained by Foreign Pubco, with Canco indirectly being included in what is spun-off, CRA will require that the 10% limitation in s. 55(3.1)(b)(i)(A)(II) be complied with, so that at all times less than 10% of the fair market value of the shares of Foreign Spinco is derived from the shares of Canco.
CRA has ruled that if Foreign Spinco borrows money from a third party following the butterfly reorganization and before the spin-off, such debt will be considered to reduce the fair market value of the assets of the holding companies for Canco, and the other assets of Foreign Spinco, on a pro rata basis for these purposes, even if there is no logical connection between the use of that borrowing and the shares of Canco.
Neal Armstrong. Summary of 2012 Ruling 2011-0425441R3 under s. 55(3.1)(b)(i) (also discussed below).
CRA provides a net asset butterfly ruling that an indemnity neutralizes the assumption of liabilities by the transferee corporation.
In a net asset split-up butterfly, the assets to be transferred to the transferee corporation were first rolled down to a Newco by the distributing corporation in consideration for shares and the assumption of liabilities, with Newco then being transferred (through several steps) to the transferee corporation. CRA ruled that the net asset value of Newco was not reduced by the assumed liabilities to the extent that the distributing corporation agreed to indemnify Newco for such assumed liabilities.
Neal Armstrong. Summary of 2012 Ruling 2011-0425441R3 under s. 55(1).
Inovalis REIT will invest largely free of entity-level tax in French and German office properties
The Inovalis Real Estate Investment Trust will invest through a Luxembourg subsidiary in subsidiaries holding prepaid headleases of French and German office properties, with a right to receive rents from the subtenants and an option to acquire the properties from the headlessors. The arrangements have been structured to avoid French corporate income tax and German municipal trade tax, minimize German corporate income tax and defer German land transfer tax.
In order to avoid FX risk to the REIT, the debt owing to it by its Luxembourg subsidiary is denominated in Canadian dollars. MRPS (which are shares and debt for Canadian and Luxembourg tax purposes, respectively, and can be exchanged under s. 86 on maturity) might not have been not used because of the foreign tax credit generator rules (see draft s. 91(4.7)) and a concern that there might be underlying German or French taxes.
The REIT will be able to distribute all the FAPI allocated to it.
Neal Armstrong. Summary of Inovalis Real Estate Investment Trust preliminary prospectus under Cross-Border REITs.
Starlight LP-on-U.S.-REIT structure will use a hybrid blocker
Like the American Hotel Income Properties REIT LP offering, the Starlight U.S. Multi-Family Core Fund (also an Ontario LP) will invest in U.S. real estate through a private U.S. REIT. However, in the Starlight offering, an Ontario subsidiary LP (which will be a corporation for Code purposes) and a Delaware LP will be sandwiched between the public LP and the U.S. private REIT. This will insulate the public unitholders and their fund more thoroughly from potential FIRPTA issues and the U.S. public partnership rules - while at the same time the structure will still be treated as transparent (under Art. IV.6) for the purposes of U.S. withholding on dividends paid by the U.S. private REIT. For example, there will be 0% U.S. withholding on dividends indirectly paid to RRSP unitholders of the Starlight fund.
The American Hotel fund is seeking to avoid FAPI treatment by relying on the proposition that hotels generate services rather than property income, whereas the Starlight structure will rely on the six employee and mother ship tests.
Neal Armstrong. Summary of Starlight U.S. Multi-Family Core Fund Circular under Foreign Asset Income Funds and LPs.
Dysert - Tax Court finds that a four-year work stint in Canada was "sojourning" (i.e., a "temporary" stay)
Three Americans, who were not factually resident in Canada during their four-year stay in Alberta to work on a Syncrude project, were deemed to be resident in Canada under the "sojourning" rule even though Boyle J. accepted that this term referred to a "temporary visit or stay." However, they qualified for Treaty purposes as resident only in the U.S. under the tie-breaker rule: although their modest Alberta apartments were "permanent homes," their centre of vital interests was in the US.
Scott Armstrong. Summaries of Dysert v. The Queen, 2013 TCC 57, under ss. 2(1) and 250(1)(a), and under Treaties - Article 4.
CRA clarifies what's in a letter granting exemption from s. 116 withholding on real estate inventory sales
In IC72-17R6, para. 36, CRA states that it will provide a certificate of compliance to a non-resident vendor of land inventory for purposes of s. 116 stating that there is a "qualified business exemption" if it is satisfied that specified conditions are met. In a recent Technical Interpretation, CRA describes what this certificate (a letter) typically will state, including a direction to the purchaser not to withhold under s. 116.
Neal Armstrong. Summary of 29 January 2013 T.I. 2012-0470331E5 under s. 116(5.3).
Income Tax Severed Letters 27 February 2013
This morning's release of 21 letters from the Income Tax Rulings Directorate is now available for your viewing.