News of Note
Meranex Energy uses more recent corporate structure for investing in U.S. business
Email this ContentMeranex Energy Trust is proposing a structure for investing in a U.S. oil and gas business that essentially is identical to that used in Argent Energy Trust and other more recent offerings: it will use a corporate structure, i.e., investing in a Canadian holding corporation which will hold a US Opco, as well as investing in notes of the US Opco. This contrasts to the earlier Eagle Trust offering, which used a hybrid structure (i.e., holding units and interest-bearing notes of a Canadian sub trust that is a corporation for US tax purpose which, in turn, holds a Delaware LP that is disregarded for US tax purposes).
Accordingly, issuers may now be starting to vote in favour of this corporate structure for this type of cross-border business. However, note that the new kid on the block is the Crius offering, which uses a similar corporate structure to Meranex, except that the Canadian mutual fund trust elects to be a partnership for U.S. purposes and contributes the cross-border debt to a subsidiary sub trust - perhaps in order to maximize potential U.S. interest deductions.
Neal Armstrong. See summary of Meranex Energy Trust preliminary prospectus under Foreign Asset Income Funds and LPs.
CRA reconfirms that receipt of a capital distribution on a share can result in a loss of interest deductions
Comments of CRA in IT-533, para. 31, indicate that where a taxpayer borrows at a negative spread (e.g., borrowing to acquire preferred shares with a dividend rate lower than the interest rate), the interest generally will be deductible in full. However, CRA has also indicated that where there is a paid-up capital distribution on shares acquired with borrowed money, there will be a proportionate loss of the interest deduction to the extent that the capital distribution is used for personal purposes. See 1993 A.P.F.F. Round Table, Q.3.
Both propositions have recently been confirmed. The second proposition is somewhat questionable where the quantum of the capital distribution is not sufficient to significantly impair the income-producing potential of the shares in question.
Neal Armstrong. Summary of 15 August 2012 T.I. 2012-0446741E5 under s. 20(1)(c).
9098-9005 Québec Inc. - Tax Court comments on the legal impossibility of a salaried partner
An individual who managed a partnership for a fixed fee "through" a corporation of which he was the sole officer and shareholder would have been an officer of the partnership but for the interposition of his corporation - so that the corporation was found to be carrying on a personal services business (with a resulting loss of the small business deduction).
Before reaching this conclusion, Bédard J. noted that the same individual could not have been viewed as an employee (as contrasted to the holder of an office) of the partnership as (at both common law and Civil Law) it was "well established that a partner cannot be an employee in his own partnership." This legal proposition is in part the basis for a CRA position that fixed partnership draws paid to a "salaried" partner cannot give rise to a deductible loss to the other non-salaried partners. See Income Tax Technical News, No. 30.
This case also may indicate that in some circumstances, "fees" paid to an individual partner-manager of a partnership are exempt from GST/HST under s. 272.1 of the Excise Tax Act.
Neal Armstrong Summaries of 9098-9005 Québec Inc. v. The Queen, 2012 TCC 324 under s. 125(7) - personal services business and s. 248(1) - office.
Crius Energy Trust offering uses a double-hybrid structure
Crius Energy Trust, which will be a listed Canadian mutual fund trust, proposes to elect for US purposes to be a partnership. It will indirectly invest in an LLC (carrying on an energy distribution business in the U.S.) which will be a partnership for US purposes but a US corporate subsidiary for Canadian purposes. The US anti-inversion rules are expected not to apply as it will initially acquire only a 1/3 interest in the LLC.
Neal Armstrong. Summary of Crius Energy Trust preliminary prospectus under Foreign Asset Income Funds and LPs.
CRA provides transitional relief for 2-tier joint ventures
When CRA withdrew its position allowing joint ventures to compute income as if they had a separate fiscal period, it also indicated that it would allow transitional relief by allowing the deferred income to be brought into income over a period of up to five years (similar to the rule in s. 34.2).
CRA has indicated that this administrative transitional relief also will apply to the the full amount of the deferral of 22 months' worth of income that was deferred as a result of a two-tier joint venture (e.g., the corporate taxpayer is a member of a joint venture with a fiscal period ending one month later which, in turn, is the member of a second joint venture with a fiscal period ending yet a further one month later).
Neal Armstrong. Summary of 28 August 2012 T.I. 2012-0454811E5 under s. 249.1(1).
Slate U.S. Opportunity (No. 2) Realty Trust is structured as a cross-border mutual fund without an initial listing
The Slate U.S. Opportunity (No. 2) Realty Trust proposes to invest in US real estate through an Ontario "holding company" LP and a Delaware "grandchild" subsidiary LP, both of which will elect to be corporations for US purposes. The offered units do not appear to be intended to be listed - but the offering contemplates a listing of the units (or an exchange of the units) by September 30, 2018 or an asset sale by them. In order that the Trust can in the meantime qualify as an open-end unit trust for Canadian tax purposes, there is a technical retraction right, but one which likely is not commercially meaningful.
Neal Armstrong. Summary of preliminary prospectus for Slate U.S. Opportunity (No. 2) Realty Trust offering under Foreign Asset Income Funds and LPs.
CRA construes the GST/HST damages rule (s. 182) narrowly
Section 182 provides that where a supplier under an agreement for a taxable supply receives an amount as a result of a breach or termination of the agreement, this payment is deemed to be inclusive of GST/HST, and the payor generally is entitled to an input tax credit for the included GST/HST.
In a ruling dealing with a damages payment received by a company which was not paid the remaining instalments on equipment it was constructing, CRA stated that section 182 did not apply because the supplier did not receive that payment as a consequence of the breach or termination of the agreement - so that the payor of the damages was not entitled to an input tax credit for GST. On the facts described, this finding seems to be incorrect. Perhaps there was a lack of understanding of basic contract law principles on the part of CRA, or perhaps there was something redacted from the ruling that would justify this conclusion.
Neal Armstrong. Summary of 8 March 2012 Ruling 137942 under ETA s. 182(1).
CRA finds that an online retail business is not carried on in Canada for GST/HST purposes notwithstanding the place of contracting is in Canada
CRA has ruled that a non-resident selling on-line books over the internet to Canadian residents whom it solicited in Canada was not carrying on business in Canada notwithstanding the place of the contracts was in Canada.
Neal Armstrong. Summary of 29 March 2012 Ruling Case No. 137186 under ETA s. 240(1).
CRA indicates that trailer fees are GST/HST exempt only if the dealer is not providing on-going client services in order to earn the fees
CRA has ruled that trailer fees received by dealers from the investment manager for an investment fund (presumably, a mutual fund) will be considered to be exempt consideration for having facilitated the sale of shares in the fund only if the dealer does not provide any post-sale servicing of the investor's account in order to earn the trailer fees, e.g., regularly contacting the client to review the appropriateness of this investment, and reviewing alternatives. Although this may sound like a statement that trailer fees are exempt only if the investment dealer is not doing a good job, in fact this statement may not be problematic as the trailer fees will be earned by the dealer based on the level of continued investment in the fund irrespective of the level of post-sale service provided by the dealer.
Neal Armstrong. Summary of 15 March 2012 Ruling 132880-2 under ETA s. 123(1) - financial service.
CRA reviews taxable benefit exemptions for fitness and recreation facilities
CRA has clarified its position in Guide T4130 that the provision to employees of fitness and recreation facilities (whether in-house or external) will not give rise to a taxable benefit provided that the facilities are available to all employees: "all your employees" means all employees in the firm, not all employees in a specific department (even where the facilities were provided to reduce sickness and injury resulting from the nature of the work performed in that department).
T4130 also sets out an exemption where it can be shown that the provision of the facilities is principally for the employer's benefit rather than the employee's. CRA has stated that this means that the benefit to the employer must be direct (i.e. relating to a high fitness standard inherent to the specific job) rather than indirect (i.e. relating only to general productivity gains associated with health and fitness).
Scott Armstrong. Summary of 26 July 2012 T.I. 2011-0431681E5 under s. 6(1)(a).