News of Note
Cross-border PUC/stated capital differences should be maintained on an amalgamation
Where the cross-border paid-up capital of a CRIC (a Canadian corporation controlled by a non-resident parent) has been suppressed under the foreign affiliate dumping rules as a result of making a direct or indirect investment in a non-resident "subject corporation," so that such PUC is now lower than the stated capital of those shares, and the CRIC then amalgamates with a Canadian subsidiary, it generally will be a mistake to set the PUC of the shares of Amalco at an amount equal to the PUC of the CRIC’s shares going into the amalgamation. The likely effect of this will be to preclude Amalco from subsequently fully accessing the PUC-reinstatement rule in s. 212.3(9). See Example 9-E.
Neal Armstrong. Discussion of need for stated capital to effect a PUC reinstatement under s. 212.3(9) under Maintenance of stated capital/PUC discrepancy.
A deemed dividend may arise if the parent funds a CRIC by way of contributions of capital
In light of the foreign affiliate dumping rules, it often will be inadvisable for a non-resident parent to fund the investment of a Canadian holding company (a "CRIC") in foreign affiliates with a contribution of capital rather than with a share subscription. Although s. 84(1)(c.3) will not prohibit subsequently converting the contributed surplus of the CRIC arising from this contribution into cross-border paid-up capital, this will not retroactively eliminate any cross-border deemed dividend otherwise arising at the investment time. See Example 7-G.
Neal Armstrong. Discussion of s. 84(1)(c.3) under s. 212.3(7) - Contributions of capital.
Simultaneous exchanges of consideration on a Canadian Buyco indirect acquisition of a subject corporation generally are a bad idea
When a Canadian corporation controlled by a non-resident parent (a CRIC) makes a direct or indirect investment in a foreign "subject corporation," a corresponding deemed dividend to the parent generally can be avoided only to the extent of the cross-border paid-up capital immediately before the investment time. Accordingly, if the non-resident parent accomplishes an acquisition of a Canco holding the subject corporation by using a Canadian Buyco and – in order to avoid extra cash movements – structures the acquisition so that there are simultaneous (i) transfers of the shares of Canco to Buyco, (ii) payments of the cash purchase price to the Canco shareholders by it on behalf of Buyco, and (iii) issuance of shares by Buyco to it in consideration for such cash payment, there generally will be a deemed dividend to it rather than a suppression of the PUC of the shares it holds in Buyco. See Example 7-F.
Neal Armstrong. Discussion of s. 212.3(7) timing requirements under s. 212.3(7) - Need for timely cross-border PUC.
Thompson - Federal Court of Appeal affirms that client names are not inherently privileged
Trudel JA found that the Minister was within her rights to require a lawyer to disclose his current accounts receivable listings, including client names and contact info - subject to any instances where a client's identity "constitutes the foundation of the retainer" or "the essence of the consultation," in which case disclosure of the name would be protected by solicitor-client privilege.
In passing, she also noted that lawyers' statements of account may be privileged.
Scott Armstrong. Summaries of Thompson v. The Queen, 2013 FCA 197, under s. 232 - Solicitor-Client Privilege and s. 230(2.1).
PDM Royalties – Tax Court finds that an internal agreement to allocate inputs for GST purposes on an IPO was ineffective
An attempt to obtain input tax credits for GST incurred on the IPO of an income fund was unsuccessful.
Although the income fund and a subsidiary LP (which held the business) agreed that the taxable expenses were to be incurred for the account of the LP, this was not sufficient to make the LP the "recipient" of the services, as it was not a party to the agreements with the services providers. As V. Miller J was not informed of the 2nd order supply rule in s. 185(1), she also considered that even if the expenses had been incurred by the LP in order to issue LP units in consideration for receiving the IPO funds, that represented an exempt supply which would not have entitled the LP to ITCs.
Neal Armstrong. Summary of PDM Royalties LP v. The Queen, 2013 TCC 270 under ETA – s. 169(1) and Input Tax Credit Information (GST/HST) Regulations, s. 3.
CRA interprets the Shell concept of FX hedging narrowly
CRA considered that a taxpayer, who hedged an FX (capital account) debt owing by it to related parties by entering into foreign currency forward contracts in the amount of the principal owing, realized losses on the forwards on income account because there was no linkage between their maturity dates (they were rolled over every month) and that of the debt. This is a narrow construction of what constitutes a hedge.
Neal Armstrong. Summary of 26 June T.I. 2013-0481691E5 under s. 9 – capital gain v. profit – foreign exchange.
Income Tax Severed Letters 4 September 2013
This morning's release of 25 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA respects a “gift” of shares to a public foundation occurring in a technology-commercialization context
S. 149.1(3)(c), which effectively prohibits a public foundation from acquiring control of any corporation, is ameliorated by s. 149.1(12)(a), which indicates that there is no such acquisition of control where the foundation has not acquired the shares of the corporation for consideration.
CRA has ruled that the gift of all the shares of a taxable corporation by a charitable organization to a public foundation comes within this exemption notwithstanding that this occurs as part of a broader arrangement for commercializing technology rights which the charitable organization had transferred to the corporation.
Neal Armstrong. Summary of 2013 Ruling 2012-0443321R3 under s. 149.1(12)(a).
Concurrent small LP investments of a sister-in-law can convert small shareholdings in Canadian resource companies into taxable Canadian property
Under the July 12, 2013 draft amendments, a small shareholding in a Canadian resource or real estate company will be taxable Canadian property if the same non-resident investor, or a non-arm's length person, also held units of various partnerships which, in aggregate had 25% (or close to 25%) of the shares of the same company - and similarly for income funds or REITs.
There will be expansions to the standard jello jiggler circular disclosure for non-residents.
Neal Armstrong. Summary of Jack Bernstein and Francesco Gucciardo, "TCP Proposal Overshoots Objective?", Canadian Tax Highlights, Vol. 21, No. 8, p. 4 under s. 248(1) - taxable Canadian property.
IMIC plc acquisition of Afferro uses a Canadian Buyco and is 1/3 financed by an Afferro CFA upstream loan
Although the foreign affiliate dumping rules can be avoided, where a Canadian target public company holds most of its assets in foreign affiliates, by the foreign acquirer purchasing the shares of the target shareholders directly (see Effective Energy and Nordgold), cross-border acquisitions are still using Canadian Buycos. This might make sense if the paid-up capital of the target is low, and there is real potential down the road for using the high stated capital of the Buyco to distribute sales proceeds of the underlying foreign affiliates under the PUC reinstatement rule.
A recent Buyco example is the IMIC plc proposed acquisition of Afferro using a BC subsidiary Buyco. 1/3 of the consideration includes convertible notes of IMIC, but with this being handled so that it does not interfere with the (cross-border) stated capital of shares issued by Buyco to IMIC.
Around 1/3 of the purchase price is being funded by a Seychelles subsidiary of Afferro making a loan to IMIC simultaneously with the acquisition of the Afferro shares by the Buyco.
Neal Armstrong. Summary of Circular of Afferro Mining Inc. respecting its acquisition by International and Mining Infrastructure Corporation plc under Mergers & Acquisitions – Cross-Border Acquisitions - Inbound – Canadian Buyco.