Words and Phrases - "ordinary course of the business"
19 October 2023 Internal T.I. 2020-0856851I7 - Ordinary Course of Business
In 2010, a Canadian corporation, which was a specified financial institution by virtue of being controlled by its parent, a Canadian insurance corporation, subscribed for 9,350,000 mandatory redeemable preferred shares of Luxco 1 (“MRPS” – subsequently, “Class A MRPS”) for US$935,000,000. Luxco 1 used those proceeds to make loans to US foreign affiliates for use in the corporate group’s US operations. In 2012, the MRPS and common shares of Luxco 1 were transferred on an s. 85(1) rollover basis to a Canadian subsidiary (XXXXXXXXXX). In 2015, the latter used common share subscription proceeds from its parent to subscribe for 2,000,000 Class B MRPS of Luxco 1 worth US$200,000,000, with the proceeds lent to a US CFA in the group which, in turn, acquired a US property manager.
The MRPS (which were term preferred shares) were fully voting, were redeemable and retractable by the company or the holder, were required to be redeemed at the end of 13 years, and were convertible by the holder at any time into ordinary shares with a value equal to the MRPS par value plus, accrued and unpaid dividends, share premium account and attached reserve account.
The various dividends paid on the MRPS were treated as interest for Luxembourg purposes.
The activities of the Canadian parent of Luxco 1 were limited to providing a guarantee (for guarantee fees) to US Ops Holdco (the parent of a US borrower from Luxco 1) and holding the shares of US Ops Holdco and Luxco 1.
Before finding that it was likely that the MRPS were not acquired in the ordinary course of the business carried on by such Canadian parent, the Directorate stated:
In order to constitute “carrying on” a business, it normally requires some continuity, frequency and regularity of the commercial activities. It is arguable that the acquisition of the Class B MRPS is not considered part of the ordinary course of business carried on by XXXXXXXXXX, but rather the acquisition may be considered an isolated and special transaction that is not part of a course of conduct that involves repeated dealings of a similar nature.
After further referring inter alia to the finding in 2001-0079985, that even though the acquisition of preferred shares is an isolated event, it does not preclude it being “in the course of” and the statement in Citibank Canada that “the question is whether the present arrangement is, at its core, a debt financing arrangement or a capital investment by Citibank in the issuers of the shares,” the Directorate went on to state:
Therefore, it is also important to consider whether the arrangement in the current case, at its core, more closely resembles a debt financing arrangement or a capital investment. …[W]e are more inclined to conclude that the arrangement more closely resembles a capital investment. … XXXXXXXXXX is not in the business of lending money to the general public or to any disinterested third parties and the loans it made were limited to its foreign related corporations. All of the proceeds from the issue of the Class A and Class B MRPS were used by Luxco 1 to make loans to XXXXXXXXXX US foreign affiliates for their US operations. … This supports the view that the share acquisition of the Class B MRPS by XXXXXXXXXX represents a capitalization of a subsidiary.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 112 - Subsection 112(2.1) | MRPS used to finance US opco or opco acquisition were not acquired in the ordinary course of the business | 360 |
3 May 2006 Internal T.I. 2005-0133341I7 F - Cours normal des activités de l'entreprise
As part of a reorganization relating to the sale of a share investment in Bco by Aco (a specified financial institution), a partnership of which Aco was a member received dividends on term preferred shares of Gco. Regarding whether the exception for dividends not received in the ordinary course of the business applied, the Directorate first noted that it was its position that in the s. 112 context, a corporate member of a partnership receives a dividend paid to the partnership to the extent of its share thereof. The Directorate then stated:
In this case, Aco as a venture capital corporation is not a passive investor. … [W]hen the time is right, Aco realizes its investments and profits from them. … [T]hese facts alone demonstrate that generally Aco's share acquisitions would be made in the ordinary course of business of the corporation it operates. …
… Gco was only formed to be used in the process of disposing of Aco's interest (via XXXXXXXXXX) in the capital stock of Bco. Consequently, we are of the view that in order to conclude that the shares of the capital stock of Gco were acquired in the ordinary course of business of the business carried on by Aco, it must be shown that Aco acquired the shares of the capital stock of Bco in the ordinary course of business of the business it carried on.
Such a demonstration requires a comparative analysis of the investments Aco has made in the ordinary course of its business over the years in order to identify what is ordinary and what is exceptional. For example, the circumstances that ordinarily surround share acquisitions, Aco's conduct and involvement in the management of the businesses, the business relationships with the managers and corporations, the manner in which the shares are acquired and held, the source of the funds invested, the length of time the shares have been held, the field of activity of the businesses, and any other relevant factors could form part of such an analysis. In addition, it should be determined whether Aco's conduct in relation to its investment in Bco is similar and analogous to its conduct in relation to its other investments. To the extent that, based on such an analysis, it was demonstrated that Aco's investment in Bco was not exceptional in relation to its other investments, we would be of the view that the shares of the capital stock of Gco would have been acquired in the ordinary course of the business carried on by Aco and/or XXXXXXXXXX and that subsection 112(2.1) would apply … .
576315 Alberta Ltd. v. The Queen, 2001 DTC 776 (TCC)
The taxpayer ("241467"), which previously had engaged exclusively in a leasing business, was found to be engaged in a financing business that included the lending of money in light of the fact that of 24 identified transactions (including non-interest-bearing loans to the shareholder or relatives, which Bonner J regarded (at para. 7, as "falling outside the scope of business"), approximately 16 were interest-bearing loans made over a four-year period including various loans to finance trucking businesses. (After noting (at para. 8) the "distinction ... to be drawn between an indebtedness which arises as a result of the deferral of payment of the whole or part of a sale price and an indebtedness which arises as a result of the loan of money," he found that the deferred balance of the purchase price of sales were not loans, with reference to another two of the 24 transactions.)
Bonner J stated (at para. 18):
241467 entered into lease and loan transactions repeatedly with a view to earning income in the form of lease payments or interest. The financing business was its ordinary business and the lending of money was part of that activity. ...Moreover the presumption arising from incorporation must be taken into account...[even for] corporations formed under some statutes...not list[ing] their corporate objects.
A loan made by the taxpayer to a corporation ("161") to enable 161 to purchase a restaurant company ("606") was made in the ordinary course of that business notwithstanding that the taxpayer also subscribed for 86% of the shares of 161 ("The acquisition by a lender of control over the borrower is a sensible arrangement particularly where the lender is advancing virtually all of the borrower's capital ..." (para. 22).) However, a subsequent loan made by the taxpayer to 606 in order to enable 606 to pay rent, taxes and other accumulated debts was not in the ordinary course of its lending business since, at the time the money was advanced, there was little hope of repayment, and less hope of ever receiving interest.
Bastion Management Ltd. v. The Queen, 95 DTC 5238, [1995] 2 CTC 252 (FCA)
The taxpayer, which was a trader in commodity futures, purchased 15,000 ounces of gold and 500,000 ounces of silver shortly before its year-end and, at the same time, sold futures contracts for corresponding quantities of gold and silver at the same prices, for delivery after its year-end. Shortly after its year-end, it sold the gold and silver and liquidated the futures contracts.
Linden J.A. found that the trial judge's finding that the taxpayer was a commodity futures trader, whose business did not ordinarily include the buying and selling of commodities in their physical form, was "unimpeachable" after referring to the statement in re Bradford Roofing Industries Pty., Ltd., (1966) 84 WN. (Pt. 1) (N.S.W.) 276 at 285 that, regarding the phrase "in the ordinary course of the business", the "requirement is that the transaction must fall into place as part of the undistinguished common flow of the company's business, that it should form part of the ordinary course of the company's businesses carried on, calling for no remark and arising out of no special or particular situation".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Statutory Interpretation - Purpose | 86 |
Société d’Investissement Desjardins v. Minister of National Revenue, 91 DTC 393, [1991] 1 CTC 2214 (TCC)
The taxpayer, which was a venture capital corporation, was found not to have received a deemed dividend on a term preferred share in the ordinary course of the business carried on by it. The term preferred shares, which were held by the taxpayer for only nine days before their redemption, were not acquired in accordance with the taxpayer's investment philosophy, which was to acquire medium- and long-term investments. Instead, they were acquired as part of an arrangement to maintain the taxpayer's voting interest in the corporation notwithstanding the issuance of voting shares to employees. Tremblay J. also noted that s. 112(2.1) "was clearly enacted to avoid the improper use by lending institutions of shares similar to loans the dividends on which were tax-free while the interest on such loan had to be included in the income of these corporations", whereas here no such abuse was intended by the taxpayer (p. 410).