News of Note
Shulkov - Tax Court of Canada accepts valuation of shares using 5-day VWAP
Email this ContentAfter surviving a 17-day trial focused on whether s. 160 applied to the transfer of substantial blocks of shares of penny stock by an executive of the company in question to his common law wife, D'Arcy J. accepted the valuation of the transferred shares in the Crown's valuation report - which valued the shares at each transfer time at their 5-day VWAP, and applied a discount ranging from 1.3% to 3.6% to reflect that it would take up to 44 days to sell-off each transferred block.
Neal Armstrong. Summary of Shulkov v. The Queen, 2012 TCC 247 under General Concepts - Fair Market Value - Shares.
CRA ruling appears to accept that partnership loss or income can be allocated disproportionately to the capital accounts
In order to be allocated a portion of the losses of a partially-owned subsidiary, the subsidiary will roll its business into a newly-formed subsidiary LP for Class A units, and the majority shareholder then will fund the LP's need for additional capital by subscribing directly for Class B units with the same per-unit income entitlement. Although the ruling letter is ambiguously drafted on the point, CRA appears to have accepted that loss (or income) will be allocated between the Class A and B unitholders in proportion to their respective number of units, even though capital distributions (i.e., in excess of income) can be made disproportionately on the Class A and B units.
Neal Armstrong. Summary of 2012 Ruling 2011-0421261R3 under s. 103(1).
CRA treats management fees paid by a non-profit organization as disguised profit distributions
CRA found that a non-profit organization, which had made a significant investment in a taxable corporation and which paid substantial management fees to its non-profit sole member corporation, was almost certainly ineligible for the s. 149(1)(l) exemption. The management fees, which were well in excess of any management costs of the sole member, were treated effectively as profit distributions for the benefit of the member - and it was irrelevant that the member itself was an NPO.
CRA's conclusion is consistent with other recent positions it has taken pursuant to its "NPO project," which are based inter alia on CRA's position that Woodward's establishes that "if the objectives of the organization cannot be achieved without the making of a profit, then the organization must be organized and operated for the purpose of profit."
Scott Armstrong. Summary of 21 November 2012 Memorandum 2012-055501I7 under s. 149(1)(l).
Income Tax Severed Letters 2 January 2013
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Any Spartan dissenters on Bonterra acquisition receive capital gains treatment
Bonterra will acquire all the shares of Spartan under a share-for share exchange, resulting in potential rollover treatment under s. 85.1. This was considered to be a "Superior Proposal," so that Spartan has terminated its arrangement agreement with Pinecrest and paid a break fee of $12.5M to Pinecrest.
In order that dissenters will not get deemed dividend treatment, their Spartan shares are transferred to Bonterra under the Alberta Plan of Arrangement. The Arrangement Agreement, which is 86 pages before Appendices, reads like a full-blown bilateral share purchase agreement.
Neal Armstrong. Summary of Spartan/Bonterra Joint Circular under Mergers.
CRA rules that making loss-utilization loans did not change a corporation’s principal activities
CRA ruled that the making of intra-group loans in order to soak up unutilized non-capital losses and credits would not disqualify a corporation’s activities as being "primarily the carrying on… of a business that is a Canadian film or video production business." A similar point could arise under various principal business corporation definitions such as in s. 66(15) and Reg. 1100(12).
Neal Armstrong. Summary of 2012 Ruling 2012-0426581R3 under s. 111(1)(a).
Pacific Rubiales includes nominal cash in consideration for acquisition of C&C Energia in order to enhance bump
C&C Energia is spinning-off 95% of the shares of a newly-formed exploration subsidiary (Platino Energy), followed by an acquisition of all the C&C Energia shares by Pacific Rubiales in exchange for Pacific Rubiales shares (representing 7% of its shares in aggregate) and nominal cash consideration – so that no rollover treatment is available unless the C&C Energia shareholders make a joint s. 85 election with Pacific Rubiales. A likely reason for so limiting rollover treatment is enhancing the potential s. 88(1)(d) bump for capital property of C&C Energia.
Neal Armstrong. Summary of C&C Energia Circular under Mergers & Acquisitions – Mergers.
CRA confirms that valid price adjustment clauses also have retroactive effect for s. 75(2) purposes
CRA confirmed that a valid price adjustment clause for an estate freeze transaction generally will be considered to have retroactive effect for purposes of s. 75(2) (i.e., so that the freezor is not considered to have indirectly transferred property to the family trust as a result of the trust acquiring common shares at an undervalue) as well as for other income tax purposes provided that the clause is implemented.
CRA implicitly assumed that an adjustment to the freeze preferred shares would entail the corporation making or receiving an adjusting payment on those shares' redemption. This, in fact, is unlikely to be the case, as it generally would be preferable for the price adjustment clause to apply directly to the redemption amount of those shares - rather than keeping the redemption amount fixed and making adjustment payments.
Neal Armstrong. Summary of 5 October 2012 APFF Round Table, Q. 1 2012-0453891C6 F under General Concepts - Effective Date.
Income Tax Severed Letters 24 December 2012
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA will apply changes to the OECD Transfer Pricing Guidelines retroactively
CRA will apply the revised version of the OECD Transfer Pricing Guidelines to transactions which were completed, and treaties that were concluded, before its release on July 22, 2010 "since the revisions are [only] intended to increase clarity in the application of the arm’s length principle."