News of Note
CRA issues butterfly ruling letter respecting a foreign spin-off transaction
Email this ContentCRA has issued another ruling letter on a cross-border butterfly, in which a spin-off business is transferred from DC, which is a Canadian sub of a foreign public company (Foreign Pubco), to TC, which is a subsidiary of a non-resident subsidiary (Foreign Spinco Parent) of Foreign Pubco. Foreign Spinco Parent is then distributed as a dividend-in-kind to the public shareholders of Foreign Pubco.
Similarly to the ruling described in an October 28th post, there was a requirement that the equity of TC not represent 10% or more of the equity of ForeignSpinco Parent in order to stay on-side with s. 55(3.1)(b)(i).
Neal Armstrong. Summary of 2012 Ruling 2012-0439381R3 under s. 55(1) - distribution.
CRA provides questionable ruling that fees generated by non-Interac-member provider of point-of-sale terminals are not exempt from GST/HST
CRA has ruled (in 17 May 2012: 62492, with a similar interpretation provided in 5 June 2012: 127795) that "independent sales organizations" or ISOs (i.e., organizations which are not Interac Association Members) which sell point-of-sale terminals to merchants and engage an Interac member to provide payment processing services to the merchants are not providing (GST/HST exempt) financial services as the service provided by them is predominantly the transfer, collection or processing of information and/or an administrative service performed by it without being financially at risk - and therefore is deemed to be a taxable service under the Financial Services (GST/HST) Regulations.
This ruling is questionable given that the Interac member is engaged as a subcontracter of the ISO, so that insofar as the merchant is concerned, what it is getting from the ISO is predominantly a payment service. However, a crucial feature of the structure is that, when the merchant contracts with the ISO, it agrees to pay the fees of the Interac processer out of the per-transaction fees generated from the merchant's customers - so that, arguably, there is a direct supply being made by the Interac processer to the merchant. Having said that, the ruling is internally inconsistent as it also indicates that the ISO is providing a single supply including [Interac] processing services to the merchant.
Neal Armstrong. Summaries of 17 May 2012 Ruling 62492 under Financial Services (GST/HST) Regulations and ETA - s. 123(1) - Financial Service and summary of 5 June 2012 Interpretation 127795 under ETA - s. 123(1) - Financial Service.
CRA rules on joint employment arrangement for avoiding GST/HST on intra-group charges
If a management company is reimbursed for its payroll costs by other group companies, those reimbursement charges generally will be subject to GST or HST except in the limited circumstances where s. 150 or 156 elections are available.
A group company (Company A) was represented to CRA as employing management and IT individuals partly for its own account and partly as agent for two other group companies. CRA ruled that payroll reimbursement payments which Company A will receive from the other two companies wil not be consideration for taxable supplies - notwithstanding that the individuals will be managed by Company A and will be treated only as its employees for source deduction and income tax reporting (T4) purposes.
Neal Armstrong. Summary of 15 May 2012 Ruling Case No. 142436 under ETA - S. 123(1) - Business.
Gallic shareholders are given three tax options on triangular amalgamation with Petromanas
Although a picayune deal, the shareholders of Gallic will have a relative wealth of choices respecting its proposed triangular amalgamation with an acquisition subsidiary of Petromanas: an s. 85.1 exchange (permitting loss recognition); a s. 85 rollover (any elected amount between cost amount and fair market value); or a s. 87(9)(a) rollover (automatic rollover at adjusted cost base if capital property).
Neal Armstrong. Summary of Gallic circular under Mergers & Acquisitions - Triangular amalgamations.
CRA confirms that a CFA taxation year is determined under foreign tax law
CRA has confirmed that the taxation year of a foreign affiliate for purposes of the foreign affiliate rules normally is the taxation year of the foreign affiliate under the taxation laws of its country of residence. Accordingly, an intra-group transfer of the holding company for subsidiaries in a particular foreign country to another non-resident company in the group will not cause a short taxation year. This is so even though this transfer results in the transferee company becoming the company which prepares consolidated tax returns (albeit, still on a calendar year basis) for that foreign country.
In the old days, you could not get CRA to rule on completed transactions. In this ruling, the proposed transaction is the filing of the foreign group consolidation election (i.e., a foreign tax law election) - everything else was a completed transaction.
Neal Armstrong. Summary of 2012 Ruling 2012-0449941R3 under s. 95(1) - taxation year.
CRA indicates that late-filed s. 98(5) designations will be accepted at CRA's discretion
Where a partner carries on a partnership's business after the partnership's dissolution, s. 98(5) of the Income Tax Act allows that partner to make a designation to "bump" the cost amount of non-depreciable capital property. CRA has stated that, although the Act does not provide any mechanism for late-filed or amended designations, CRA may accept such designations at its discretion.
Scott Armstrong. Summary of 20 September 2012 T.I. 2012-0452411E5 under s. 98(5).
Income Tax Severed Letters 7 November 2012
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is available for your viewing.
TORC uses a triangular amalgamation with Vero to effect a backdoor IPO
A private Alberta corporation (TORC) will issue ordinary and flow-through subscription receipts on a private-placement basis, then engage in a triangular amalgamation with a public Alberta company (Vero), so that its shareholders become shareholders of Vero - and the holders of the flow-through subscription receipts, viewed as a right now to acquire (flow-through) Vero shares, exercise that right.
Neal Armstrong. Summary of Joint TORC/Vero Circular under Mergers & Acquisitions - Triangular amalgamations.
Recent convertible debenture offerings continue to corroborate double-digit inter-company interest rates
Junk bond yields have declined. For example, the Merrill Lynch U.S. High Yield Master II Index (which has no published Canadian equivalent) declined from a high of 23.26% in December 2008 to a low (so far) of 6.27% on October 18, 2012.
There nonetheless is evidence in the Canadian convertible debenture market to support inter-company (or cross-border) interest rates in excess of 10% where the borrower is not blue-chip on a stand-alone basis. Although CRA treats convertible debentures as indivisible instruments (see IT-96R6), economically they consist of a warrant, and a debenture with an implied yield which is higher than the stated coupon. For example, in the ENTREC offering of 7% $1,000 convertible debentures, if the embedded call option were valued at $250 so that the included "pure" debenture in effect was being purchased for $750 then, depending on what assumptions were made as to when the convertible debentures will likely be converted or mature, the yield on that pure debenture might be over 15%. Moving more downstairs, the NAT offering of 10% convertible debentures had an even higher implied yield.
Neal Armstrong. Summaries of ENTREC and NAT short form prospectuses under Offerings - Convertible Debentures.
Global Equity Fund - Federal Court of Appeal uses s. 9 jurisprudence in a GAAR case to establish the object and spirit of the Act's business loss provisions
The corporate taxpayer implemented a loss generation plan similar to those in 1207192 Ontario and Triad Gestco. It had a subsidiary declare a stock dividend of preferred shares in order to deplete the value of its common shares of the subsidiary, and sold those shares to a family trust in order to generate a loss - which it reported on income account because it had a securities trading business. These transactions were found to abuse ss. 3, 4, 9 and 111, which reflect a policy that "business losses must be grounded in some form of economic or business reality" - so that the loss was denied under the general anti-avoidance rule.
A difficulty for the Crown was that the central provision for the computation of business income or loss (s. 9) is antiquated and essentially devoid of substantive content. How on earth could the Crown establish its "object, spirit or purpose" under the required "textual, contextual and purposive" approach?
No problem! Mainville, J.A. found that Canderel had established that s. 9's goal "is to obtain an accurate picture of the taxpayer’s profit [or loss] for the year," so that it was contrary to this object to recognize a "paper loss" under s. 9.
Neal Armstrong. Summaries of The Queen v. Global Equity Fund Ltd., 2012 FCA 272 under s. 245(4) and s. 152(9).