Recent Transactions. of Interest

Transcription

1 Recent Transactions Rick Bennett, Borden Ladner Gervais LLP, Vancouver Edward Rowe, Osler, Hoskin & Harcourt LLP, Calgary VAN01: v1 Vancouver 2014 New Uses of Cross Border Income Trusts (CBITs) Background > Publicly listed income trusts > Avoid SIFT tax by investing exclusively outside Canada > Typically no or low foreign tax > No entity level tax in Canada at CBIT level > Qualified investments for registered plans > McCue & Johnson, Current Transactions: Cross-Border Income Trusts/Foreign Asset Investment Trusts, [2012] Conference Report, 8:1 8:39 2

2 New Uses of CBITs SIFT Rules - The Basics Status Rules (1) and 248(1) > SIFT trust > publicly listed mutual fund trust that holds at least one non-portfolio property > Non-portfolio property ( NPP ) > securities of a subject entity that is not a portfolio investment entity, if their FMV > the equity value of the subject entity > Canadian real, immoveable or resource property if their FMV > 50% of the equity value of owner > property used in a business carried on in Canada 3 New Uses of CBITs SIFT Rules - The Basics, cont d Status Rules (1) and 248(1), cont d > Subject Entity ( SE ) > corporation or trust that is resident in Canada > a Canadian resident partnership i.e. a Canadian partnership, a partnership formed under Canadian law, or a partnership that would be resident in Canada if it were a corporation (central management and control) > a non-resident person, or a non-canadian resident partnership whose principal source(s) of income is (are) Canadian > Portfolio investment entity ( PIE ) > a corporation, trust or partnership that holds no NPP 4

3 New Uses of CBITs SIFT Rules - The Basics, cont d Taxation Rules - 122, 104(6)(b)(iv), 104(16), and 122.1(1) > SIFT Trust cannot deduct non-portfolio earnings ( NPE ) - 104(6)(b)(iv) > income from NPP other than taxable dividends from taxable Canadian corporations (1) > SIFT Trust pays corporate tax on the undeductible amount - 122(1)(b) > SIFT Trust s distributions deemed paid out of NPE last > SIFT Trust s deemed distributions of non-deductible amount to beneficiaries are deemed to be taxable dividends from a taxable Canadian corporation - 104(16) 5 New Uses of CBITs Eagle Energy Trust Canada US Notes and Units Unitholders Units Eagle Energy Trust ( EET ) Eagle Energy Commercial Trust ( CT ) Units Eagle Energy Acquisition LP ( US Acq LP ) Original Structure (no Canadian assets) SIFT Status Analysis US Acq LP provided its central mind and management is not exercised in Canada, US Acq LP not a SE regardless, US Acq LP has no NPP and therefore is a PIE CT interest in US Acq LP is not NPP, because either (or both) US Acq LP is not a SE, and is a PIE therefore CT holds no NPP, and therefore is a PIE (note: CT is a Canadian resident trust and thus is a SE) EET EET s CT units and notes are securities of a PIE, and therefore are not NPP therefore EET holds no NPP and is thus not a SIFT trust SIFT Taxation Analysis Since EET is not a SIFT trust, the SIFT taxation rules do not apply to it or its beneficiaries 6 U.S. oil and gas interests

4 New Uses of CBITs Eagle Energy Trust, cont d Unitholders Units New Structure (some Canadian assets) SIFT Status Analysis US Acq LP and CT unchanged from above US Acq LP remains a PIE and not a SE, and therefore its securities are not NPP Notes and Units EET Shares CT unchanged from above CT remains a PIE, and therefore its units and notes are not NPPI CT Units Canada US US Acq LP U.S. oil and gas rights 7 Can Acq Co Canadian resource properties Can Acq Co is a corporation resident in Canada and therefore is a SE holds NPP (Canadian resource properties) and therefore is not a PIE EET its Can Acq Co shares are worth > 10% of Can Acq Co s equity value, and are therefore NPP therefore EET is a SIFT Trust even though the status of its CT units and notes as not NPP is unchanged therefore the impact of the SIFT taxation rules is important New Uses of CBITs Eagle Energy Trust, cont d Unitholders Units New Structure (some Canadian assets), cont d SIFT Taxation Analysis Canada Notes and Units Units CT EET Shares Can Acq Co Canadian resource properties NPE provided all distributions from Can Acq Co to EET are either taxable dividends or returns of capital, no NPE, and therefore no deduction denial under 104(6)(b)(iv) consequently no corporate tax to EET under 122, and no deemed taxable dividends on distributions to EET s unitholders under 104(16) since NPE does not include income from non-npp, the SIFT taxation rules will not apply to EET s income from its CT units and notes US US Acq LP 8 U.S. oil and gas rights

5 New Uses of CBITs Eagle Energy Trust, cont d Unitholders New Structure (some Canadian assets), cont d Canada Units EET CT Can Acq Co Canadian resource properties Other Comments Can Acq Co must not be a subsidiary of CT CT would then hold NPP (Can Acq Co shares) and thus it would cease to be a PIE its units and notes would therefore become NPP of EET consequently EET s income from CT, excluding only its designated taxable dividends from Can Acq Co, would be subject to SIFT taxation rules at the EET and unitholder levels in effect, EET s income and distributions derived form US Acq LP would be subject to SIFT tax US US Acq LP 9 U.S. oil and gas interests New Uses of CBITs Eagle Energy Trust, cont d Unitholders Units EET Assumptions Income from US Acq LP 900 Interest on CT Notes 100 Income on CT Units 800 Taxable dividends from Can Acq Co 100 Unitholders EET Notes and Units Shares CT Can Acq Co CT Canada US Units Canadian resource properties Units Can Acq Co US Acq LP Canada Canadian resource properties US U.S. oil and gas rights US Acq LP EET s NPE = income from NPP Taxable Dividends = = 0 EET s NPE U.S. oil and gas rights = income from NPP Taxable Dividends = ( ) =

6 New Uses of CBITs Argent Energy Trust Unitholders Canada U.S. US OpCo Notes Argent Energy Trust ( AET ) CanHoldCo Original Structure (Units only) US OpCo is not a SE, and is a PIE CanHoldCo is a PIE AET is not a SIFT Trust and SIFT taxation rules do not apply Little or no US corporate tax for US OpCo 5% US WHT on dividends to CanHoldCo 0% US WHT on interest and return of principal/capital Exempt surplus in CanHoldCo Eligible dividends to AET US OpCo U.S. oil and gas assets 11 New Uses of CBITs Argent Energy Trust, cont d Unitholders Convertible Debentureholders New Structure (Convertible Debentures) Canada U.S. US OpCo Notes AET CanHoldCo Convertible Debenture Terms 6.5% interest, payable semi-annually AET may elect to pay principal and interest in cash, units or combo (5% premium if paid in units) 5 year term Convertible at $12.50 per unit Redeemable by trust after 2 years if unit price > 125% of conversion price Tax No bearing on AET s status as non-sift Usual rules apply to interest and conversation US OpCo 12 U.S. oil and gas assets

7 Royalty Corporations PrairieSky Royalty Ltd. Core assets Core assets Public Encana Corporation ( Encana ) Royalty Assets fee lands lessor interests royalties Encana Other Non-core assets PrairieSky Royalty Ltd. ( PrairieSky ) November 2013 Strategic Plan Focus on five identified plays Divest non-core assets Spin off royalty assets Target assets transferred to PrairieSky ( 85) Fee lands: 5.2M acres of oil & gas rights 1.1M acres of coal rights Immediate free cash flow Working capital: $37.7M Tax Pools: $500M ($457M COGPE; $42.3M CEE; $.7M CDE) No operational risk 13 Royalty Assets fee lands lessor interests royalties Royalty Corporations PrairieSky Royalty Ltd., cont d Encana Public IPO Core assets $1.67B Non-core assets 46% PrairieSky 64% May, % (64% under over-allotment options) of PrairieSky $28.00/share Royalty Assets Public 100% Encana PrairieSky Secondary Offering Core assets $4.27B Non-core assets Royalty Assets September 2014 Encana sells remaining 46% for $2.6B ($36.50/share) 14

8 Royalty Corporations Osisko Gold Royalties Corp. 1. Starting Gate Public Osisko Mining Corporation ( Osisko ) Yamana Gold 50% 50% Agnico Eagle Marketable Securities and Subsidiaries ( Misc. Assets ) Canadian Exploration Properties ( CEP ) Canadian Malartic Mine ( Mine ) Canadian Malartic Co. ( CMC ) cash 15 Royalty Corporations Osisko Gold Royalties Corp., cont d 2. Osisko Rolls Down Assets Public Osisko Osisko transfers Mine to Canadian Malartic General Partnership ( CMGP ), reserving NSR Osisko transfers NSRs and Misc. Assets to Osisko Gold Royalties Ltd. ( New Osisko ) - 85 CEP GPCo. New Osisko CMGP Mine Misc. Assets NSRs in Mine, CEP 16

9 Royalty Corporations Osisko Gold Royalties Corp., cont d 3. Optionholders and Non-Residents Resident Public Osisko Cash Optionholders and Non-Resident Public Yamana Agnico Eagle In-the-money optionholders exercise for Osisko Common shares Optionholders and non-resident Osisko shareholders transfer Osisko Common shares to CMC for Yamana stock, Agnico stock and cash ( Transaction Consideration ) and right to receive New Osisko shares. GPCo. CMGP Mine CEP New Osisko Misc. Assets NSRs CMC Cash Assume this sequencing: eliminates risk of Part XIII tax on distribution of New Osisko shares to non-residents (see below) permits optionholders to elect to segregate cost of Osisko shares acquired on option exercise under 7(1.31) and 47(3)(b) 17 Royalty Corporations Osisko Gold Royalties Corp., cont d Reorganization of Osisko s Capital Resident Public As Osisko As CEP GPCo. New Osisko CMGP Cash Optionholders and Non-Resident Public Yamana CMC Agnico Eagle Osisko creates new Class A Common shares (2 votes/share) Each old Osisko Common share exchanged for 1 Class A share and 1 new Osisko share Deemed dividend (= FMV of new Osisko share PUC of old Common share) possible, but not expected Otherwise, normal 86 rules apply Note that optionholders and non-resident public not part of 86 reorganization Misc. Assets NSRs Cash Mine 18

10 Royalty Corporations Osisko Gold Royalties Corp., cont d 5. Complete Acquisition of Osisko Cash Public and Optionholders CMC distributes New Osisko shares to Optionholders and Non-resident Public New Osisko Yamana Agnico Eagle Resident Public transfer Osisko A shares to CMC for Transaction Consideration (taxable) Misc. Assets NSRs CMC New Osisko shares consolidated 10:1 CMC and Osisko amalgamated next day Osisko GPCo. CEP CMGP 19 Mine Inversion Transaction what is it? > A transaction in which a USCo (or US multinational group) restructures so that the USCo becomes a subsidiary of a Non-USCo Shareholders Shareholders USCo USCo Shares Non-US Co Non-US Co. Shares Other Subsidiaries USCo Other Subsidiaries 20

11 Inversion Transaction typical mechanics > Merger Sub merges into USCo > USCo shareholders receive shares of Non-USCo in exchange for their shares of USCo Shareholders Shareholders > Objective is for new public corp. not to be a USCo for US tax purposes > USCo management becomes management of New Pubco > Effectively a reverse take-over of Non-USCo by USCo > Example: the once proposed QLT- Auxilium merger 21 USCo Non-US Co. Shares Merger Sub Non-US Co Other Subs Inversion Transaction typical mechanics > Non-USCo in a tax-friendly jurisdiction > Ireland > What about Canada? > Tax synergies not achieved by merger alone Shareholders Non-US Co > Future operations outside US tax net > Refinance USCo with debt > Transfer non-us properties out from under USCo USCo Other Subs 22

12 Principal US Tax Considerations > Code Section 7874 > Can nullify US tax benefits of inversion transaction. > Important to structure transaction so that either: > Shareholders of USCo end up owning less than 80% of the new foreign parent corporation; OR > After the inversion, the affiliated group of corporations has substantial business activities in the country in which new foreign parent is organized (essentially requires 25% of income, assets and employees located in that jurisdiction) 23 Principal US Tax Considerations > Code Section 7874 (cont d) > Non-US target corporation can t be acquired with a principal purpose of avoiding 7874: Fundamental importance of business synergies > If shareholders of USCo own between 60-80% of new Non-US parent, special U.S. tax rules apply, including a 20% excise tax on equity based compensation of certain insiders > Restriction on use of attributes to shelter inversion gain 24

13 Principal US Tax Considerations (cont d) > Code Section 367 > US shareholders of USCo generally subject to tax on their exchange of old USCo shares for new Non-USCo parent shares if they receive more than 50% of the combined corporation > If shareholders of USCo will receive more than 50%, shareholder level tax may be managed through complex planning (depending on particular facts) 25 Notice (Proposal to Limit Inversions) > IRS & Treasury Department announce new regulations that target inversion transactions > The new rules generally apply to an inversion in which > former shareholders of the USCo own at least 60% of the stock of the new combined company, and > new Non-USCo parent does not satisfy the substantial business activities test > The new regulations apply to inversion transactions closing on or after Sept. 22,

14 Notice (Proposal to Limit Inversions) > Restrict post-inversion planning designed to access trapped offshore earnings of U.S. corporation > Tighten the 7874 Stock ownership tests > Stop so-called spinversion transactions 27 Proposed Tightening of Inversion Rule > Obama FY 2015 Budget Proposals > Reduce USCo shareholder continuity threshold from 80% to 50% > Even if shareholder continuity below 50%, Non-USCo treated as a USCo if (a) substantial business activities in U.S., and (b) primarily managed in the U.S. > Levin Bills (House & Senate). > Similar, but retroactive to May 8, 2014 (Senate bill has 2 yr sunset) > Schumer Bill > Stiffens earnings stripping rules for any USCo that inverted in the last 20 years > Sweeping obligation for inverted USCos to enter into Approval Agreement for transactions with Non-US related persons 28

15 Paladin Labs Inc. / Endo Health Solutions Inc. Keeper Assets Paladin Knight Therapeutics Knight Assets Pre- Combination 1 share New Endo Irishco Interco Canco1 1 share Endo Health DE Inc. Merger Sub (US LLC) 29 Paladin Labs / Endo Health > Each of Paladin and Endo Health own a single share in New Endo prior to combination transaction > Paladin shareholder steps occur under CBCA Plan of Arrangement > Immediately after Plan of Arrangement, Merger Sub merges into Endo Health and Endo Health shareholders get one New Endo Share for each share of Endo Health > Paladin shareholders end up with 23% of New Endo and Endo Health Shareholders with 77% of New Endo 30

16 Paladin Labs / Endo Health > Paladin shares indirectly acquired by New Endo for following consideration > New Endo ordinary shares and 1 Knight common share for each Paladin common share > $1.16 subject to cash adjustment based on a 10-day weighted volume price of New Endo shares: full compensation for 7-20% decline, half compensation for 20-24% decline and none beyond 24% > Option Plan: options fully vest; settled in exchange for: > 1 Knight common share, plus > A number of New Endo shares equal to: x (in-the-money amount per share + Arrangement cash) Paladin TSX c/s closing price before Arrangement 31 Paladin Labs / Endo Health Qualifying Holdcos By election, Canadian resident shareholders may transfer Paladin shares to a Qualifying Holdco New Endo Paladin Irishco Knight Therapeutics Interco DE Inc. Canco1 Merger Sub (US LLC) Endo Health 32

17 Paladin Labs / Endo Health Qualifying Holdcos 1. Sell Paladin/Qual. Holdco shares to Canco1 for: cash from New Endo; New Endo shares; and (after step 5) Knight shares from successor to Canco1 New Endo Paladin Irishco Knight Therapeutics Interco DE Inc. Canco1 Merger Sub (US LLC) Endo Health 33 Paladin Labs / Endo Health 2. Canco1 issues shares to New Endo in consideration for New Endo paying cash and issuing shares to Paladin shareholders in respect of step 1 3. Canco1 shares contributed downchain by New Endo Qualifying Holdcos New Endo 3 Irishco 2 Paladin Interco DE Inc. Knight Therapeutics Canco1 Merger Sub (US LLC) Endo Health 34

18 Paladin Labs / Endo Health 4. Canco1 and the Qualifying Holdcos amalgamate to form Amalco New Endo Irishcos Amalco DE Inc. Knight Therapeutics Paladin Merger Sub (US LLC) Endo Health 35 Paladin Labs / Endo Health 5. Paladin sells shares of Knight to Amalco for a Note New Endo Amalco delivers Knight shares to former Paladin shareholders as part consideration for sale of Paladin shares in Step 1 Note Irishcos Amalco DE Inc. Paladin Knight Therapeutics Merger Sub (US LLC) Endo Health 36

19 Paladin Labs / Endo Health Knight Therapeutics New Endo 6. After Plan of Arrangement steps: Merger Sub merges into Endo Health and New Endo issues shares to Endo Health shareholders Irishcos Amalco Paladin DE Inc. Merger Sub (US LLC) Endo Health 37 Paladin Labs / Endo Health ~23% ~77% Knight Therapeutics New Endo Final Structure Irishcos Amalco DE Inc. Paladin Endo Health 38

20 Consequences to Equity Holders > Capital gain to Paladin shareholders for Canadian tax purposes equal to: (Cash + FMV of Knight share + FMV of New Endo share) ACB of Paladin shares > Paladin holders now hold shares of an Irish company > Option holders should get s. 7(1)(b) treatment on disposition of options > Tax disclosure provides uncertainty whether Endo Health shareholders will have to realize a capital gain for U.S. tax purposes 39 Consequences to Endo > Expected that IRC 7874 not applicable to deem Endo Health to be a USCo > Endo could be a PFIC of New Endo US shareholders > Endo Health will lose ability to use its tax attributes to offset U.S. taxable income from certain transactions since Endo holders own greater than 60% > Excise tax on employee compensation may apply (depends on whether shareholders realize a gain) Employees will be grossed-up > BEPS disclosure 40

21 Tim Horton s/burger King > Inversion transaction under which a new Canadian corporation ( Holdings ) becomes parent of Tim Horton s Inc. ( THI ) and Burger King ( BK ) a USCo > Shareholders of THI receive C$6.50 cash and shares of Holdings but can elect to receive $88.50 in cash OR of Holdings common shares, subject to pro-ration (THI shareholders receive 22% of Holdings Shares on a fully-diluted basis) > Shareholders of BK receive shares of THI and/or a unitized interest in a partnership ( OLP ) that is exchangeable for common shares of Holdings > Exchangeable partnership units are exchangeable for common shares on a 1:1 basis > Cash funded by bank debt and preferred share investment from Berkshire Hathaway 41 Tim Horton s/burger King > THI shares to be acquired by an acquisition subsidiary of OLP for cash and shares of Holdings > BK shares to be acquired through a merger of a direct subsidiary of Holdings into BK > On merger, shareholders get choice of Holdings common shares or units of OLP exchangeable for Holdings common shares > Holdings common shares and exchangeable units both listed 3G/BK public 3G/BK public common 78% Exchangeable LP units AFTER Berkshire Hathaway preferred Holdings (Canada) OLP THI public 22% BK THI 42

22 Tim Horton s/burger King > Tax Treatment of Equity Holders > Since THI shares are acquired by an indirect subsidiary of Holdings, no rollover available for Canadian tax purposes > U.S. shareholders are entitled to a rollover under IRC s. 721 to extent they receive exchangeable units > Fully-taxable transaction to U.S. Shareholders to extent they receive shares of Holdings > Rollover for option holders 43 Tim Horton s/burger King > Use of Holdings as new parent allows cash consideration and leverage into Canada > Holdings Preferred Shares are taxable preferred shares > Significant dividends and deemed dividends > Need significant income to absorb Part VI.1 tax > OLP not a Canadian partnership > No rollover > Withholding tax on payments to partnership > No withholding tax on distribution 44