News of Note

A non-resident corporation was assessed penalties under s. 162(2.1) for its failure to file returns (although it had no substantive liability due to losses).  Its request for relief under s. 220(3.1) for the pre-2010 penalties was premised on the law being in a "state of flux" until the Federal Court of Appeal decision in Exida.com (which found in that year that a penalty instead was exigible under another section).

CRA denied the request on the basis that this decision had settled the matter.  The Federal Court granted the non-resident corporation’s application for judicial relief on the basis that this did not at all address the taxpayer’s requested basis for relief.

Neal Armstrong  Summary of Cogesco Sevices Ltd. v. Attorney General of Canada, 2013 CF 1238, under s. 220(3.1).

Father, who was the beneficiary of a Quebec family trust along with his children, distributed qua trustee the trust income to bank accounts for the children, with those amounts immediately being paid "back" to him to reimburse him for specific and "general" expenses which he had made for their supposed benefit.

Although these arrangements were less sloppy than in Degrace and Langer, CRA nonetheless found that the distributions were not income of the children as these amounts were not at their disposal, and were received by them as mandataries for him.  However, the same mandatary characterization established that the trust was entitled to a s. 104(6) deduction for the income which effectively had been distributed to him.

Neal Armstrong.  Summaries of 10 July 2013 Memo 2013-0475501I7 F under s. 104(13), s. 104(6) and s. 105(1).

Angle Energy shareholders have sold their share to Bellatrix for cash or Bellatrix shares (but with the overall cash/share split fixed at 22%/78%), followed by an amalgamation of Bellatrix, Angle and an Angle subsidiary (ARI).  The first step under the plan of arrangement was the s. 98(3) winding-up of a partnership between Angle and ARI.

Angle shareholders who wish to elect under s. 85(1) or (2) will be able to download "pre-signed" election forms from the Bellatrix website.  Presumably Bellatrix will have no way of monitoring whom it has "jointly" elected with, in which case it may not be able to correctly compute the cost of its Angle shares or the PUC limit for the shares issued by it.

Neal Armstrong.  Summary of Joint Circular of Angle Energy and Bellatrix Exploration under Mergers & Acquisitions – Mergers – Shares for Shares or Cash.

Delavaco, which is a privately-held Ontario corporation holding US single-family rental homes through Delaware partnerships, will be going public by merging into a small capital pool company (Sereno) under a triangular amalgamation with a Sereno subsidiary, so that Delavaco shareholders will receive approximately 99% of the shares of Sereno (whose name will be changed to Delavaco Residential Properties Inc.)

This transaction represents a change of heart from May 2013, when Sereno and Delavaco entered into a letter of intent for the acquisition by Sereno of all the Delavaco shares pursuant to a plan of arrangement, and for Sereno’s subsequent conversion into a REIT.

It likely would be advantageous for the new public entity to be a flow-through entity for Canadian and US purposes if the US operations could also be held in a US private REIT (see American Hotel and Granite).  However, such a structure might restrict options for disposing of the homes (and some have occurred already in Delavaco’s short life).  A US private REIT is subject to a 100% tax on any net income derived from the sale or other disposition of "dealer property" (other than foreclosure property), i.e., real estate held by the taxpayer primarily for sale to customers in the ordinary course of business.

Neal Armstrong and Abe Leitner.  Summary of Joint Delavaco and Sereno Circular under Mergers & Acquisitions – Amalgamations - Triangular Amalgamations.