The Tax Implications of Asset Securitization

Transcription

1 The Tax Implications of Sania Ilahi, Ernst & Young LLP, Toronto, Blake, Cassels & Graydon LLP, Toronto 67 th Annual Tax Conference 67e Conférence fiscale annuelle 2015 Agenda Introduction What? Why? Who? Selected income tax and sales tax issues in Lease securitizations Mortgage securitizations Trade receivables securitizations 2

2 What is? Legal segregation of income-producing assets from originator for benefit of investors Sale to investors of debt instruments secured by assets or co-ownership interests in assets (ABS) Assets are bankruptcy remote and can survive if originator fails Investor recourse limited to assets 3 Why Securitize? Benefits to Originator Lower cost of funds Liquidity Balance sheet management Lower capital requirements Benefits to Investor Investment in specific assets Portfolio diversification Isolation of credit risk from originator Ratings 4

3 Who Are The Parties? BACKUP SERVICER SWAP COUNTERPARTY (Basis Risk/Fixed/ Floating Rate/Currency) Servicing Indenture Trustee BORROWERS Debt $ SELLER Assets $ Purchase Price SPECIAL PURPOSE ENTITY ABS $ Proceeds INVESTORS FINANCIAL SERVICES AGENT RATING AGENCIES Fees Admin Services Credit Rating LIQUIDITY PROVIDERS CREDIT ENHANCERS 5 What Assets Can Be Securitized? Assets that can be pooled to generate predictable cash flows Examples: Equipment/auto leases Residential/commercial mortgages Trade/credit card receivables Different asset = different structure and issues 6

4 Lease Securitizations Features of Commonly Used Structures Originator retains equipment and claims CCA (sale/sale/leaseback or concurrent lease) OR Originator transfers equipment subject to leases to LP, LP claims CCA and allocates loss to Originator Not transfer of lease receivables 7 Lease Securitization Structure Sale/Sale/Leaseback 3. Equipment Note 2 ABS/ABCP LESSEES LESSOR (Owns Equipment) 1. Equipment & Leases SPECIAL PURPOSE ENTITY Note 1 $ INVESTORS Servicing 2. Master Lease 4. $ - Prepayment of Rent under Master Lease 8

5 Sale/Sale/Leaseback Step 1: Step 2: Step 3: Step 4: Lessor sells Equipment & Leases to SPE for Note 1 Master Lease between Lessor and SPE SPE agrees to lease property sold back to Lessor in Step 3 Sale of Equipment subject to Master Lease from SPE to Lessor for Note 2 Note 1 setoff against Note 2 SPE uses proceeds of ABS issuance to prepay rent under Master Lease 9 Lease Securitization Structure Concurrent Lease $ - Prepayment of Rent under Concurrent Lease LESSEES Equipment Leases LESSOR (Owns Equipment) Concurrent Lease SPECIAL PURPOSE ENTITY $ - Payments under Equipment Leases Servicing $ ABS/ABCP INVESTORS 10

6 Concurrent Lease Lessor agrees to concurrently lease leased equipment to SPV Lessor remains owner of Equipment By virtue of the Concurrent Lease, SPE vested with rights under the Equipment Leases, essentially SPE interposed between Lessees and Lessor SPE uses proceeds of ABS issuance to prepay rent under Concurrent Lease 11 Recent Lease Securitization Structure ORIGINATOR LP Interest GPCo GP Interest LP Notes TRUST CP INVESTORS Equipment Subject to Leases 12

7 Recent Lease Securitization Structure Originator transfers Equipment subject to Lease to LP for LP interest and LP note s.97(2) election available LP uses proceeds of borrowing from Trust to repay LP note or return capital to Originator 13 A Lease Is A Lease! Determination based on legal relationship created by terms of agreement NOT attempt to ascertain underlying economic reality In the absence of a sham, a lease is a lease Existence of bargain purchase option does not change true lessor-lessee relationship, but may be appropriate to allocate portion of lease payments to acquisition of option 14

8 Income Tax Issues Leasing Property Rules Apply to property used principally for gaining or producing gross revenue that is rent, royalty or leasing revenue Maximum CCA for a year in respect of property = taxpayer s income for the year from renting, leasing or earning royalties from leasing properties before deducting CCA, less loss for the year from such activities Principal business corporation/partnership (PBC) exception 15 Income Tax Issues Specified Leasing Property (SLP) Rules Apply to property with FMV > $25,000 that is subject to an arm s length lease with a term greater than one year Exceptions: intangible property and exempt property, e.g. most automobiles CCA restricted on a property-by-property basis to lesser of: normal CCA, and amount determined under a notional interest/principal approach if the lease were recharacterized as a loan 16

9 Income Tax Issues PBCs PBCs not subject to leasing property rules Half-year rule does not apply to SLP of PBCs Once-and-for-all election to deem all of subsequentlyacquired exempt property to be SLP half-year rule then does not apply Election to include one or more exempt properties in a separate class for CCA purposes may trigger terminal loss 17 Income Tax Issues PBCs Principal business throughout the year is either Renting or leasing property, or Renting or leasing property combined with selling and servicing property of the same general type and description AND Gross revenue for each year from such principal business = 90% or more of gross revenue from all sources 18

10 Income Tax Issues PBCs PBC status throughout the first year common to transfer a few leased equipment on formation of SPE Partnership qualifies as PBC if each member is: a corporation that is a PBC OR another PBC partnership Gross revenue of partnership from a source included in gross revenue of member from that source based on member s profit sharing ratio 19 CRA Document ACo BCo CCo Equipment Subject to Leases Equipment Subject to Leases Equipment Subject to Leases Partnership Equipment Subject to Leases 20

11 CRA Document CRA document Example B Each corporation retains 10% of leases One or two businesses? Question of fact. If two businesses, which one is the principal business and whether that business meets the 90% test CRA: Not PBC if one business produces 89% of gross revenues and the other produces 11% of gross revenues result may be unintended Consider corp. on corp. on LP structure 21 Income Tax Issues Prepaid Rent Lessor: s.12(1)(a) income inclusion and s.20(1)(m) reserve In year of termination of Master Lease / Concurrent Lease e.g. restructure into recent lease securitization structure, Lessor pays refund of prepaid rent to SPE Lessor entitled to s.20(1)(m.2) deduction 22

12 Sales Tax Issues Sale/Sale/Leaseback Transfer of Equipment to SPE GST/HST/QST will apply on equipment based on place of supply rules SPE required to register for GST/HST and QST SPE entitled to input tax credits ( ITCs )/input tax refunds ( ITRs ) Cash flow cost to SPE Consider options to minimize cash flow impact RST does not apply 23 Sales Tax Issues Sale/Sale/Leaseback Obligation to account for GST/HST/QST/RST GST/HST/QST payable by the SPE on prepayment of rent (remitted by Lessor) Not subject to RST Primary lease subject to GST/HST/QST and RST (remitted by SPE) SPE may require registration for RST in SK, MB, BC Billing agency election for GST/HST/QST 24

13 25 Sales Tax Issues - Concurrent Lease Prepayment of Concurrent Lease SPE will subject to GST/HST/QST based on place of supply SPE will claim ITCs/ITRs (assume registered for GST/QST) No RST Cash flow implications Payments under Head Leases SPE required to collect GST/HST/QST and RST on lease payments Consider agency provisions Mortgage Securitization Structure ISSUER SPE Certificateholders Originates mortgages Sells undivided co-ownership interests in mortgage pool to investors Services mortgages POOL OF MORTGAGES Undivided co- ownership interests - Fast-Pay Certificates (e.g. Classes A to D) - IO Certificates - Residual Certificates 26

14 Mortgage Securitization Nature of Certificateholder s Investment Co-owners of undivided interests in mortgage loans Fast-Pay Certificates (e.g. Classes A to D) entitled to receive payments of interest (accrued rate on certificate balance) and principal (certificate balance) in sequential order of A to D IO Certificates entitled to receive only payments of interest (accrued rate on certificate balance) Residual Certificates entitled to remaining amounts Whether payments sourced from interest or principal paid on mortgage loans may not be known until payment 27 Mortgage Securitization Prescribed Debt Obligation / Reg Reg. 7000(1)(b) - Certificateholder s proportionate entitlement to principal payments on mortgage loan is not equal to proportionate entitlement to interest payments on mortgage loan Certificateholder required to accrue annually an amount of interest determined by Reg. 7000(2)(b) to extent it exceeds amounts otherwise included in income Prepayment premium on mortgages treated as interest payable Reg. 7000(3) 28

15 Mortgage Securitization Prescribed Debt Obligation / Reg Interest payments received (and s.12(1)(c) income inclusion) > accrual under Reg s.12(9.1) excludes from income the portion of amounts received that can reasonably be considered to represent a recovery of cost of interest payment right Accrual > interest received or receivable s.20(21) deduction on disposition for FMV consideration but corresponding reduction in ACB ACB addition = accrual interest received s.20(21) deduction 29 Mortgage Securitization Fees and Expenses Certificateholder s share of various fees (e.g. servicing fee and custodian fee) generally deductible on a current basis provided reasonable CRA document R3 investors permitted to report for Canadian income tax purposes the net amount remitted to them by the issuer 30

16 Trade Receivables Securitization Structure SELLER Sells receivables at discount SPV TRUST Loan/CP LENDER/INVESTORS Receivables 31 Trade Receivables Sale vs. Secured Loan Question of commercial law Deduction of Discount Deductible as a general business expense provided sale occurs in the ordinary course of business or as part of trading in receivables Generally sale on income account unless it is part of sale of a business Frequency of sale does not change nature of discount 32

17 Sales Tax Issues - Mortgage / Trade Receivables Structure Seller usually designated as servicer Continues to service assets after transfer Servicer collects loan/lease payments and transmits to investors / trustee Service fee = fixed % of o/s loan balance Typical obligation financial and administrative services 33 Treatment of Servicing CRA assessment on servicing element As a result of an extensive review of the industry, it is our finding that most of the securitization agreements contemplate a separate fee for servicing which is clearly distinguishable from the purchase price of sold mortgages In accordance with GAAP, since these servicing fees can be material, they may be recognized as a separate source of revenue in their financial statements supplies not made for a single consideration In most securitizations, there is an amount set out in the sale agreement that dictates how much is being paid for the purchase of the mortgages as well as an amount which can be considered to be an amount in respect of servicing the Seller is reporting servicing fees providing support that there is separate consideration for the servicing of the accounts 34

18 Treatment of Servicing Canada Trustco Mortgage Co. decision single supply of serviced mortgages "inextricable interdependency" between the sale of mortgages and the provision of servicing thereof the services were not only an integral part of the sale but also "requisite as a matter of commercial exigency. The substance of the transaction is contained in the agreement between the parties 35 Treatment of Servicing Ensure agreements reflect substance Third party servicers likely subject to tax 36