News of Note
Income Tax Severed Letters 29 July 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
North American Palladium will be recapitalized through debt being exchanged for common shares
It is proposed that $345M of the debt of North American Palladium (including a fair amount of interest that accrued at a 19% rate) be exchanged under a Plan of Arrangement for treasury common shares, with the existing common shareholders thereby being diluted down to 2%. 10 days later, but also under the same Plan of Arrangement, the common shareholders will be issued rights (which will be listed on the TSX) to acquire further common shares. The two principal former debt holders (Brookfield and Polaris) will "backstop" the rights offering (so as to effectively guarantee that the target equity will be raised), but in a manner so as to comply with the s. 15(1)(c) safe harbor for rights offerings. Ineligible (non-North American) holders will not be permitted to exercise rights, which instead will be sold on their behalf.
No tax risk factors are disclosed (the debt forgiveness rules are too boring for words).
The exchanged debt would include an exchange of debentures (for which there is tax disclosure) and should qualify as a tax-free recapitalization for U.S. federal income tax purposes.
Neal Armstrong. Summary of under North American Palladium Circular under Other – Recapitalizations.
Where a corporation confers a benefit on the wife of a shareholder, CRA will apply the s.15(1.4)(c) inclusion to that shareholder rather than the other shareholders (his brothers)
S. 15(1.4) extends the operation of s. 15(1) by assimilating benefits conferred on an individual who does not deal at arm's length with, or is affiliated with, a shareholder of a corporation, to benefits conferred on the shareholder – except where the benefit is (already) included in the income of the individual or another person. Where the corporation, with four equal shareholders who are siblings, confers a benefit on the spouse of Sibling 4, CRA arguably has a choice as to which sibling will have the s. 15(1.4)(c) income inclusion, given that the spouse is related to each sibling. Not surprisingly, CRA will include the benefit in Sibling 4's income only. CRA was not asked, and it might not always be clear, whether the same approach would apply where the other shareholders are instead parents, children or personal holding companies.
Neal Armstrong. Summaries of 24 June 2015 T.I. 2015-0575911E5 F under s. 15(1.4)(c), s. 56(2) and s. 246(1).
CRA confirms that incidental business activities in Canada generally do not constitute carrying on business in Canada
In Folio S5-F2-C1, CRA provides general guidelines for determining in which countries a business of a Canadian taxpayer is carried on for foreign tax credit purposes.
In the course of a general response, CRA has referenced the same guidelines as applying for purposes of determining whether a non-resident company is carrying on business in Canada. Accordingly, a non-resident company may be able to rely on a helpful statement in S5-F2-C1 that "if…one activity of a business is clearly incidental to a predominant one, the incidental activity is not considered when determining in which country or countries the business is carried on."
Neal Armstrong. Summary of 19 June 2015 T.I. 2013-0475751E5 under s. 115(1)(a)(ii).
Income Tax Severed Letters 22 July 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on classic pipeline transactions with one year delay before amalgamation of Newco, and phased repayment of note thereafter
CRA has issued a s. 84(2) ruling on a classic pipeline transaction in which a spousal trust, following the death of the surviving spouse, will transfer its shares of a Holdco (which carries on business through a grandchild corporation) to a Newco for a note, with Holdco and its subsidiary being wound-up into or amalgamated with Newco after a year. The note will be distributed to the beneficiaries if not retained in the trust but, during the first year following the wind-ups or amalgamation, will not be repaid at a greater rate than XX% of the initial note principal per quarter. Based on 2014-0559481R3 F, XX% might be 25%.
Neal Armstrong. Summary of 2015 Ruling 2014-0563081R3 under s. 84(2).
Tallon – Federal Court of Appeal finds that a warm climate is not a medical service
In reversing the Tax Court below, Ryer JA denied medical expense tax credits on $18,000 of travel, accommodation and meal costs of an extended trip of the taxpayer and her husband to Thailand and Indonesia, whose climate was much easier on her prosthetic joints than Thunder Bay winters. He found that "because the salutary effects of the warm Thai and Indonesian climates were not provided to the Taxpayer by a person or hospital, those effects cannot constitute a medical service."
Nela Armstrong. Summary of The Queen v. Tallon, 2015 FCA 156, under s. 118.2(2)(g).
A Canadian corporate group is applying for the same loss consolidation rulings on an annual basis
The same Canadian corporate group has been applying on an annual basis for rulings on transactions to indirectly shift losses from a holding company with interest expenses (Lossco) to a subsidiary (Opco) which has listed preference shares and does not wish to incur debt. Accordingly, each year Lossco uses the typical triangular loss-shifting techniques to transfer losses to a newco subsidiary (Aco), and then transfers Aco to Opco to be wound-up into Opco under s. 88(1.1). The Additional Information states that it is anticipated that the same exercise "will be undertaken at the beginning of each future taxation year of Lossco."
Ruling applications like this, where there is no uncertainty as to the Directorate’s response, are becoming somewhat less common. Eight months ago, Mickey Sarazin noted that the inventory of rulings has decreased from around 500 about 10 years ago to about 120 now.
Neal Armstrong. Summary of 2015 Ruling 2014-0563151R3 under s. 111(1)(a).
CRA finds that the HST/GST status of a supply was to be determined at the time the agreement was entered into
ETA s. 133 provides that a supply means the entering into of the agreement to make the supply and that the actual provision of the related service or property is deemed to be part of that supply. This potentially means, among many other things, that the character of the supply generally is determined by what is agreed rather than what occurs.
Sched. V, Part III, s. 13 exempts the supply, under a meal plan that is for at least one month, by universities to their students of the right to receive at least 10 meals weekly throughout the meal plan period for a single consideration. CRA considers that these requirements are not breached if there are "top-ups," i.e., the addition of funds to the plan, and that:
The tax status of a supply… is to be determined at the time the student initially enters into the agreement with the supplier and will not be affected if, at the end of the plan period, unused funds are refunded or carried over for use in the future…[or] the plan is cancelled… and unused funds are refunded.
Neal Armstrong. Summary of Excise and GST/HST News – No. 96 under "University and public college meal plans" under ETA, Sched. V, Part III, s. 13.
CRA finds that s. 108(7) does not apply to qualify a usufruct trust as a personal trust where the usufruct was created for valuable consideration
S. 108(7)(b) provides that where all the beneficial interests in an inter vivos trust, which were acquired by way of transfer of property to it, were acquired by one person (s. 108(7)(a)) or by related persons (s. 108(7)(b)), their beneficial interests are deemed to have been acquired for no consideration (so that inter alia the trust can qualify as a personal trust). Where father transfers the bare ownership of land to his son for consideration, so that father becomes a usufructuary, ss. 248(3)(a) and (d) deem father to have settled a trust of which he and his son are the beneficiaries.
CRA considers that in this situation "as the bare owner did not transfer, assign or dispose of any property to the deemed trust… paragraph 108(7)(b) cannot apply to deem the beneficial interest of the bare owner to have been acquired for nil consideration." By referring to s. 108(7)(b), CRA is indicating that it considers that both son and father acquired their interests in the deemed trust as a result of the transfer of property by father to this deemed trust. On its face, s. 108(7)(b) only seems to require that both of these beneficial interests have been acquired by related persons (as is clearly the case for a father and son) and does not require that son have transferred any property to the deemed trust. Accordingly, this reasoning is difficult to follow.
Given the above finding that the trust is not a personal trust, the deemed wind-up of the deemed trust that would occur when son subsequently acquires father’s interest as usufructuary will (in CRA’s view) occur on a non-rollover basis under s. 107(2.1) (rather than under s. 107(2)).
Neal Armstrong. Summaries of 11 June 2015 T.I. 2014-0522641E5 F under s. 108(7), s. 73(3) and s. 110.6(1) – qualified farm or fishing property.