News of Note
GST/HST Headquarters Letters November and December 2012
Email this ContentThis 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.
RBC Life Insurance, Lordco - the Federal Court has inherent jurisdiction to go beyond the specific words of the information demand provisions
The Federal Court authorized the Minister to issue demands to some insurance companies to provide the lists of their customers who had purchased a tax product - and later reversed the authorizations when it emerged that the Minister's initial application had failed to disclose that CRA thought the product technically worked but nonetheless was planning an "audit blitz" of the product in order to discourage it.
In upholding the cancellation of the authorizations, Stratas J.A. indicated that the Federal Court had inherent jurisdiction to control abuse of process and that this included the power to reverse an authorization even where the information omitted by the Minister was not information listed in the applicable statutory provision (s. 231.2(3)) as being relevant - e.g., the motivation of CRA in deciding to initiate audits, or the level of "inconvenience and cost" to the recipients of the demands.
Scott Armstrong. Summary of MNR v. RBC Life Insurance Company, 2013 FCA 50 under s. 231.2(6). See also summary of companion case MNR v. Lordco Parts Ltd., 2013 FCA 49, under s. 231.2(3).
Primaris REIT merger will stream taxable and rollover results at choice of individual unitholders
Primaris Retail REIT subsidiaries are selling $1.9 billion of real estate to the KingSett Consortium (KingSett, OPB and RioCan), with Primaris then pushing out all of the gain (including perhaps $3.00 per unit of recapture) to its unitholders on a cash redemption of approximately 45% of its units. Primaris will then be merged into H&R REIT on a s. 132.2 merger (subject to the complication that H&R REIT is stapled to H&R Finance Trust, so that there will also be a taxable exchange of 4% of the Primaris units for H&R Finance Trust units).
Likely all of the cash redemption proceeds paid to non-residents will be subject to Part XIII or XIII.2 withholding. Primaris unitholders will be able to elect before the unitholders’ meeting whether they will receive cash or H&R units, subject to the aggregate allocation being locked in.
If CRA does not consent to permitting some of the Primaris subsidiary LPs to have short taxation years ending immediately after the real estate sale and before the merger, all the Primaris unitholders will participate in the merger into H&R REIT, and only then will the sale close with the gain being pushed out through the cash redemption of H&R units.
Neal Armstrong. Summary of Primaris Circular under REIT and Income Fund Acquisitions – S. 132.2 Mergers.