News of Note
Mertrux - UK Upper Tribunal reverses a broad interpretation given to "goodwill"
Email this ContentThe additional amount received by a Mercedes dealer for the early termination of its dealership was found to be consideration for the surrender of a contractual right (giving rise to capital gains treatment) rather than for goodwill (for which rollover treatment was available) - notwithstanding that Daimler-Chrysler (UK) Ltd. arranged for this additional amount to be paid directly to the dealer by the third party purchaser of the dealership.
This case could be relevant to the interpretation of s. 167.1 of the Excise Tax Act (no GST on the consideration for the purchase of a business or business division that is attributable to goodwill) and also to the Canadian income tax distinction between a capital gain and an eligible capital amount - although it is hard to be sure about the latter point because following some amendments to get rid of the "mirror image rule" (see Toronto Refiners) that distinction now is utterly circular: under ss. 14(1) and 14(5) - CEC-(E), an eligible capital amount is 1/2 of an amount receivable on capital account in respect of a business that is not included in computing a capital gain; and under s. 39(1)(a)(i), a capital gain does not include gain from the disposition of an eligible capital property!
Neal Armstrong. Summaries of R & C Commrs v. Mertrux, [2012] UKUT 274 (Tax and Chancery Chamber) under s. 14(5) - CEC (E) and ETA, s. 167.1.
CRA considers GAAR to be applicable where a holding partnership is used to avoid s. 84.1
CRA has indicated that it has previously concluded that there is an abusive avoidance of s. 84.1 resulting in the application of the anti-avoidance rule where all the shares of a family farm corporation are rolled into a family partnership whose only asset is those shares, and the family partnership is subsequently sold (utilizing the capital gains exemption) to a family Newco for notes of the Newco. In situations where the partnership has other (farming) assets as well (as posited in this technical interpretation), then "in order to determine if there is an abuse having regard to section 84.1, the CRA would need in particular to consider the source of funds used to pay off the consideration for the disposition of the partnership interests, as well as the value attributable to the shares of the corporation held by the partnership relative to the total value of the interests in the partnership" [TaxInterpretations transalation].
The hypothetical facts also posited a five-year gap between the roll-in of the family farm corporation shares into the partnership, and the sale of the partnership interests for the Newco notes. In this regard, CRA noted the broad meaning accorded to "series of transactions" by Canada Trustco and Copthorne in light of s. 248(10) - i.e., the subsequent sale presumably would be considered by CRA to have been made "in contemplation of" the previous roll-in transaction.
Neal Armstrong. Summary of 3 July 2012 T.I 2012-0443421E5 F under s. 245(4).
CRA gives s. 84(2) ruling on distribution of share consideration received for sale of a business
CRA ruled that where a Canadian public corporation transfers a Canadian business to a Newco, and sells Newco to a public company purchaser in consideration for equity of the purchaser, it can then distribute that equity to its shareholders, without there being a deemed dividend by virtue of the exemption in s. 84(2) (PUC distribution on the discontinuance or reorganization of a business).
This transaction would also appear to be exempted from deemed dividend treatment under the proposed amendments to s. 84(4.1) (one-time distribution of proceeds of disposition) if it were not already exempted by s. 84(2).
Neal Armstrong. Summary of 2012 Ruling 2012-0435291R3 under s. 84(2).
Michael Durst notes that OECD Working Party No. 6 has corrected a widespread notion on intangibles transfer pricing that has "always has been flatly incorrect."
In an earlier article (see post below), Michael Durst suggests that the recent OECD discussion draft on transfer pricing for intangibles performs a "valuable service" by correcting "the apparently widespread misapprehension" that bearing the financial costs of IP development entitles an affiliate to the profits of the IP's exploitation.
He also suggests that "the best indicator of [the] arm’s-length division of income [between those managing and implementing intangibles creation] normally will be the relative values that the multinational group itself places on the managers and on the implementers — that is, the relative values of their compensation."
Neal Armstrong. Summary of Michael C. Durst, "The OECD Discussion Draft on Transfer Pricing for Intangibles," Tax Notes International, 30 July 2012, p. 447 under Treaties - Art. 9.
Michael Durst endorses draft OECD suggestion of utilizing safe harbour transfer-pricing rules to avoid "donnybrooks of detailed factual analysis"
Michael Durst, a former director of the IRS APA program, has endorsed a suggestion, in a recent discussion draft respecting proposed changes to the OECD Transfer Pricing Guidelines, that countries consider plaicing presumptive weight behind safe harbour ranges of arm’s-length margins and markups for benchmarking the incomes of relatively uncomplicated business operations. He states:
Long-standing experience has now made clear that requiring tax administrations to engage with taxpayers in case-by-case donnybrooks of detailed factual analysis, without the guidance of clear presumptions of some kind, simply is not realistic; requiring this approach has proven to be a recipe for tax anarchy rather than tax enforcement.
Neal Armstrong. Summary of Michael C. Durst, "The OECD Discussion Draft on Safe Harbors – And Next Steps," Tax Notes International, 13 August 2012, p. 647, under Treaties - Art. 9.
Proposed Vector acquisition of 20-20 offers shareholders the option of utilizing safe income
In the proposed Vector acquisition of 20-20 for cash consideration (except for one 22% shareholder who is receiving partial rollover treatment), shareholders are being given the option of first transferring their shares of 20-20 into respective Newcos, having their Newco pay a safe income dividend (which might be a deemed dividend arising from a stated capital increase or a stock dividend) and selling their shares of Newco to Vector.
The intent of these transactions would be for corporate shareholders of 20-20 to utilize "their" share of the safe income of 20-20 to increase the tax basis of their shares in the Newco by the amount of a safe income dividend before selling to Vector.
Neal Armstrong. See summary of 20-20 Circular for Vector acquisition under Merger transactions.
Canadian and US competent authorities agree to adopt the 2010 OECD Report on the Attribution of Profits to Permanent Establishments
CRA announced in late July that the Canadian and US competent authorities had agreed that Article VII of the Canada-US Income Tax Convention would be interpreted consistently with the 2012 OECD 2010 Report on the Attribution of Profits to Permanent Establishments.
In Annex B to the Fifth Protocol to the Convention, they had already agreed that the OECD Transfer Pricing Guidelines would apply for purposes of determining the profits to be attributed to a permanent establishment. However, these guidelines, which apply to separate legal entities (e.g., parent and sub), do not address the issues as to how to allocate assets, and debt and equity capital, to permanent establishments which, in fact, do not legally have assets and capital separate from the rest of the same legal entity.
The 240 page Report addresses these questions among others. It indicates that "economic ownership of an asset...in particular rests upon performance of the significant people functions relevant to ownership of the asset," and that "capital needed to support risks is to be attributed to a PE by reference to the risks attributed to it and not the other way around."
Neal Armstrong Summaries of 2010 Report on the Attribution of Profits to Permanent Establishments and of CRA Notice dated 19 July 2012 under Treaties, Article 7.
Wagner - Tax Court finds parties did not deal at arm's length because they worked together to share a tax benefit
The three shareholders of a corporation, which had entered into an asset sale agreement, then arranged to restructure the agreement as a share sale in which a substantial portion of the aggregate consideration was paid to them individually as a non-compete payment (which, given that draft s. 56.4 had not yet been introduced, they expected to receive free of tax). They paid a share of their targeted tax savings to the purchaser.
Favreau J. found that the parties' allocation agreement was not an arm's length transaction, because they were "working together and had a common interest, that is, that of minimizing as much as possible the tax consequences of the transaction and to divide among them the tax saving on the projected income." All the amounts the vendors received were share sale proceeds, and they got no deduction as a disposition expense for their payment of some of the targeted tax savings.
This case illustrates that purchase price allocations will be given scant weight if they are unreasonable and the parties were not adverse in interest with respect to the allocation.
Neal Armstrong. Summaries of Wagner v. The Queen, 2012 TCC 8 at s. 68 and s. 251(1)(c).
Canada Safeway - Alberta Court of Appeal finds that the Alberta GAAR does not apply to a further provincial income-shifting transaction
This case is quite similar to Husky. Hunt JA stated that "a taxpayer is free to replace retained earnings with borrowed money," and rejected a submission of Alberta that "when a series of transactions ... is tax-motivated, every transaction comprising the series is an ‘avoidance transaction’."
Neal Armstrong. Summary of Canada Safeway v. Alberta, 2012 ABCA 232 under s. 245(4) and s. 245(3).
WesternOne Equity Income Fund proposes conversion to public company
WesternOne Equity Income Fund is proposing its conversion to a public company under a Plan of Arrangement pursuant to which the unitholders will exchange their units of the Fund for shares of a new CBCA corporation, and the Fund and the subsidiary trust of the Fund will be wound up.
Somewhat unusually, the Circular for the conversion also provides for the adoption of a unitholders' rights plan. The rights issued under this plan are all cancelled as a preliminary step in the Plan of Arrangement - then following the termination of the Fund, the rights plan is deemed under the Plan of Arrangement to have been amended so that it applies to the new public company. (The rollover in s. 85.(8) would not apply if the unitholders received rights under the rights plan as part of the consideration for their Fund units.)
As the s. 85.1(8) rollover expires at year end there may be more of these transactions.
Neal Armstrong. See summary of WesternOne Circular for conversion to a public company.