News of Note
Envision - Supreme Court grants leave to appeal
Email this ContentThe Envision decision considered whether the statutory amalgamation rules in s. 87 could be avoided by effecting a transfer, on the amalgamation, of property of one of the amalgamating corporations to a subsidiary, and on what the consequences of an amalgamation are if s. 87 does not apply.
Scott Armstrong. See: 21 June SCC Press Release; and the current summary of the Federal Court of Appeal decision in Envision Credit Union v. The Queen, 2012 DTC 5055 [at 6842], 2011 FCA 321, under s. 87, s. 13(21) - UCC - E.
Brookfield proposes spin-off of non-resident commercial real estate partnership
Brookfield Asset Management Inc. is proposing a spin-off to its shareholders of units of a non-resident partnership (BPY) that will hold its commercial real estate portfolio, so that following the distribution the public will hold 10% of BPY on a fully-diluted basis and Brookfield will continue to hold approximately 90% (including through exchangeable units of a subsidiary Bermuda LP).
The spin-off is taking the form of a taxable dividend (no vote required), rather than a paid-up capital distribution under s. 84(2) or 86.
Neal Armstrong. See summary of Preliminary prospectus of Brookfield Property Partners L.P..
Argent Energy Trust files updated IPO prospectus
Argent Energy Trust has filed an amended preliminary prospectus. Its proposed structure for carrying on a US energy business is similar to Eagle Energy, except that 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) rather than 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).
Scott Armstrong. See summary of IPO of Argent Energy Trust.
Molycorp acquisition of Neo Material uses exchangeable share structure
The proposed acquisition of TSX-listed Neo Material Technologies by NYSE-listed Molycorp would use an exchangeable share structure, so that taxable Canadian investors can elect to receive exchangeable shares of a BC subsidiary of Molcorp (Exchangeco). The electing NEM shareholders must provide completed s. 85 election forms to Exchangeco within 90 days of the effective date of the plan of arrangement, and full rollover treatment may not be available to them depending on the portion of the consideration which they are required to receive in cash.
Neal Armstrong. See summary of Circular for Acquisition of Neo Material Technologies by Molycorp
CRA provides Treaty exemption ruling based on internal going-concern valuation
CRA ruled that an internal reorganization, that would have entailed a disposition by UK companies of their shares of another UK company whose sole significant asset was a "Canco," would be exempt under the Canada-UK treaty based on the Canco shares deriving most of their value from its gas storage business, rather than hydrocarbon assets (which are not eligible for the treaty exclusion for property in which the company business is carried on).
Of interest is that the ruling was based on an internal management estimate of the going concern value of the gas storage business; and that the rulings process was used to establish that the shares were treaty-protected property (and treaty-exempt property if a s. 116(5.02) notice was given.)
Neal Armstrong. Summary of 2012 Ruling 2011-0429961R3 under Treaties - Article 13.
CRA faces difficulties in triggering price adjustment clauses for transactions in statute-barred years
Suppose that the redemption amount of preferred shares issued in Year 1 is subject to a price adjustment clause, and in auditing Year 16, when the taxpayer was deemed to dispose of those shares for their fair market value (e.g., under s. 70(5)), CRA concludes that the redemption amount was set too low. The Rulings Directorate has stated that if the price adjustment clause complied with IT-169, it will treat the redemption value of the shares as having been increased to fair market value, thereby increasing the gain in Year 16. On the other hand, if the clause did not so comply, the Directorate rather lamely states that "it could be argued" that the misvaluation in Year 1 constituted a misrepresentation that opened it up to reassessment (in this particular example, under s. 86(2)).
This situation illustrates a CRA dilemma. One of the requirements in IT-169 is that the valuation method used in Year 1 was "fair and reasonable." Accordingly, a CRA argument that the misvaluation of the shares was material may effectively be an argument that the fair market value of the shares disposed of in Year 16 cannot be increased - and CRA likely would find it difficult to discharge its onus (see D'Andrea, Cameron and Jencik) to establish that a valuation error made in Year 1 amounted to misrepresentation "attributable to neglect [or] carelessness."
Neal Armstrong. Summary of 4 May 2012 T.I. 2011-0429991E5 under General Concepts - Effective Date.
506913 N.B. - Solicitor-client privilege potentially can be retained in documents which are inadvertently disclosed
Legal advice from the Department of Justice to CRA was inadvertently disclosed to the taxpayer. D'Arcy J. found that the Minister had implicitly waived solicitor-client privilege in these documents - not when the documents were disclosed, but when the Minister failed to object when they were introduced into court records several years later (i.e., the Minister lost the privilege due to failure to act promptly once the inadvertent disclosure was discovered).
Similar considerations arise when a taxpayer inadvertently provides privileged documents to CRA or another third party, e.g., failing to remove such documents before providing a file to a CRA auditor. In such circumstances, a prompt request should be made to CRA to return the privileged documents and to destroy all copies.
Scott Armstrong. See summary of 506913 N.B. Ltd. v. The Queen, 2012 TCC 210 at s. 232.
TransGlobe Apartment REIT privatization would occur as a sale and redemption transaction
There is a proposed privatization of TransGlobe Apartment REIT. A portion of the REIT assets will be sold to members of the acquisition consortium, thereby triggering capital gains and recapture of depreciation. All of this income (plus additional income resulting from a loss of the REIT's usual capital cost allowance claims) will be pushed out to the public REIT unitholders in two ways: first, through a special cash distribution to them; and second, as a result of this increase in REIT income retroactively eliminating the tax-deferred percentage of monthly distributions previously paid by the REIT in 2012. The public's units then are redeemed in part out of cash unit subscription proceeds received from another consortium member.
Among many other interesting features, the retroactive decrease in the tax deferral percentages will retroactively increase the Part XIII tax applicable to the related distributions.
Neal Armstrong. See summary of 06 June 2012 Circular for privatization of TransGlobe Apartment REIT.
Clearwater Seafood - The public company successor of an income fund could not continue an existing income tax appeal
The Tax Court found that when the sub trust of an income fund was wound-up pursuant to s. 88.1(2) as part of a plan of arrangement for converting the income fund into a public corporation, the public corporation did not have the right to be named as the replacement appellant in a previously-launched appeal to the Tax Court - even though it had assumed all of the trust's liabilities. This raises a dilemma, as in order for roll-over treatment to apply, the trust must "cease to exist" immediately after the conversion.
The successor public company may face an assessment under s. 160(1). However, D'Arcy J. declined to decide that the sub trust had lost its standing to continue its appeal in light inter alia of the 460354 decision.
Scott Armstrong. See summary of Clearwater Seafood Holdings Trust v. The Queen, 2012 TCC 186 under s. 169(1).
CRA finds that post-judgment interest paid by the defaulting beneficial owners of a real estate project was non-deductible
CRA considered that post-judgment interest paid by two individuals on their guarantee of loans made to two nominee corporations who held a real estate project on their behalf was non-deductible because the judgment itself did not represent a borrowing by them.
This is questionable. Since they were the beneficial owners, they also were the true borrowers, and the post-judgment interest amounts could be considered to have been paid by them "pursuant to" their legal obligation to pay interest on their (initial) borrowings, which would not be extinguished until they paid the judgment.
The amount of the judgment was for the deficiency remaining after the creditors had realized on their mortgage by acquiring the properties. CRA accepted that but for the issue referred to above, s. 20.1 (which was enacted to overcome the "dispearing source" doctrine - see Emerson and Tennant) would have applied to deem the loans still to be used for an income-producing purpose following the seizure of the properties, assuming the seizure occurred after the effective date of s. 20.1.
Neal Armstrong. Summary of 12 March 2012 Memorandum 2011-0398721I7 under s. 20(1)(c).