66 th Annual Tax Conference Vancouver 2014

Transcription

1 Construction Projects Shane Onufrechuk KPMG Warren Pashkowich EY 66 th Annual Tax Conference Vancouver 2014 MCPs West Coast Style > Overview of the BC LNG Opportunity > Structuring alternatives > Financing considerations > Common income tax issues in major construction projects > Capitalization of expenses > Available for use rules > Tax shelter rules > Dealing with indirect taxes 2

2 Projected LNG-related spending > $ B natural gas E&D > $30-50B LNG facilities > $10-15B dedicated pipelines > $10-15B midstream operations >? civil infrastructure Estimated LNG capital expenditures Assuming three projects 3 Illustration of Total Government Take Relating to LNG Activities Municipal property tax BC carbon tax BC PST BC fuel tax Federal income tax BC LNG tax Provincial income Provincial royalties tax 4

3 Structuring alternatives Consistent with commercial activities Facilitates project financing Facilitates entry/exit by partners Globally tax efficient Ideal tax structure 5 Structuring alternatives > Corporation > Partnership > General > Limited > Unincorporated joint venture > Trust Commercial and/or legal constraints may be the primary drivers 6

4 Structuring alternatives Use of a Corporation > Pros: > Most common business organization in Canada > Conventional limited liability protection > Cons: > Loss of individual equity sponsor tax planning > Inefficient for tax exempt investors (i.e. pensions) > Less flexibility for tax efficient changes in interests of equity sponsors (secondary market or syndication) 7 Structuring alternatives Use of a Partnership > Pros > Elimination of entity level taxation > Possible utilization of construction period losses > Ability to allocate income selectively (more flexibility) > Income deferral opportunities (even with Section 34.2) 8

5 Structuring alternatives Use of a Partnership > Cons > Tax Shelter considerations > Specified Investment Flow-Through Partnership rules > Necessity for equity sponsors to be Canadian resident to maintain Canadian Partnership status > Unless use an LP, need to resolve liability concerns 9 Structuring alternatives > Use of a limited partnership > Limited liability protection > Limited partner cannot actively manage > General partner governance structure is required > At-risk issues: > Early year losses > Limited recourse considerations > Tax shelter considerations 10

6 Structuring alternatives > Use of a general partnership > Specified investor rules in subsection 40(3.1) > SPV limited liability partners as solution to the liability issue > Subject to 40(3.1) specified investor issue, no at-risk considerations to loss utilization > As losses can be utilized, consider impact on tax structure analysis 11 Financing considerations > Consider optimal income type to investor > Interest income > Business income > Dividend income > For non-resident investors, withholding taxes, foreign tax credits and domestic tax regime need to be considered 12

7 Financing considerations > Where debt financing is used for the project entity, consider the following > Deductibility of interest > Denial of deduction of compound interest > Construction period interest rules (subsection 18(3.1) > Thin capitalization/back-to-back loans 13 Available for use rules > CCA cannot be claimed until > The property is first used by the taxpayer to earn income > Two-year rolling start rule > Immediately prior to the disposition of the property > The property is capable of producing commercially saleable product/service > If a public company or wholly owned subsidiary, depreciation is recorded for accounting purposes 14

8 Available for use rules > Long-term project rule > Relief available if project > 2 years > Election under subsection 13(29) > Available-for-use rules apply in first 2 years, apply in excess of certain threshold amounts in subsequent years 15 Classification of expenses > Current deduction > Capital outlay > CCA 20(1)(a) > Eligible capital expenditure ( ECE ) 20(1)(b) > Interest 20(1)(c) > Financing costs 16

9 Classification of expenses > Costs on capital account > Enduring benefit > Maintenance or betterment > Integral part or separate asset > P3 context taxpayer does not own asset or land > Current deduction > Class 13 leasehold improvement > Class 14 license or concession > Eligible capital property > Inventory relating to a construction contract 17 Classification of expenses > Upfront Costs > Legal costs to establish the project entity > CRA view is ECE > Professional fees to structure and obtain financing > Paragraph 20(1)(e) > Paragraph 20(1)(e.1) > ECE 18

10 Tax incentives > BC LNG Natural Gas Tax Credit > Accelerated CCA > SR&ED > Clean technology incentives SDTC, BC ICE Fund, Advantage BC 19 Typical characteristics of MCPs > 3-4 co-investors/proponents > Government > State-owned enterprises (SOEs) > Strategic investors > Financial investors including Private Equity > No revenue for 3 5 years during construction period > Project financed > Project assets ring-fenced in a special purpose vehicle (SPV) > Term of financing matches life of project - generally > 10 years > Recourse limited to project assets > De-risked cashflow stream supporting debt 20

11 Tax shelters > Statements or representations made to a person or partnership [that proposes to buy the property] by or on behalf of [the person(s) who proposes to sell the property] > That if the person or partnership were to acquire the property > Within 4 years the deductible amounts in respect of the property would equal or exceed the cost of the property > Consider > The Queen v Baxter (FCA) 2007 DTC 5199 > Kinglon Investments Inc. v The Queen (TCC) 2014 DTC Promoters of tax shelters > Promoter is any person or partnership that > Sells, issues or promotes the tax shelter > Acts as an agent or advisor in respect of the tax shelter > Accepts consideration in respect of the tax shelter > Responsibilities > Registration of tax shelter > Proscribed disclosure obligations > Consequences of failing to register a tax shelter > Cannot accept any consideration until registered > Penalty 25% of consideration received prior to registration > Deductions deferred until registered and penalty paid 22

12 Tax shelter investments > Includes > Any property that is a tax shelter > An interest in a partnership if any direct or indirect interest in the partnership is a tax shelter investment > Consequences > An expenditure of the partnership is reduced by the aggregate of the following > Limited recourse amounts of partnership and NAL taxpayers > The Partnership s at-risk adjustment in respect of the expenditure > The limited recourse amounts and at-risk adjustment of any arm s length person to the extent such amounts relate to the expenditure 23 Tax shelter rules Investors Lender(s) Is the PI a Tax Shelter? LP LNG Facility Is the facility a Tax Shelter? 24

13 Non-income based taxes represent more than half of the fiscal take Municipal property tax BC carbon tax BC fuel tax BC PST BC LNG tax Provincial royalties Federal income tax Provincial income tax 25 Non-income based taxes > Sales taxes (GST/HST, PST/QST) > Provincial environmental taxes (e.g. BC carbon tax, BC motor fuel tax, BC ICE levy) > Customs duties > Land transfer taxes > Municipal property taxes > Payroll taxes (CPP, EI, WCB) > Resource taxes (provincial crown royalties and BC LNG tax) 26

14 Transaction taxes & MCPs > Define liability for indirect taxes in tender and project agreement > Fixed price lump sum vs. time and materials contract > Non-recoverable indirect taxes (PST, customs duties) are generally included in contract price; recoverable taxes (GST/HST) are extra > Ensure change-in-law provisions broad enough to encompass changes in included taxes (i.e. BC s transition from PST to HST and back) and that such provisions extend down to sub-trades and subcontractors 27 Transaction taxes & MCPs > Structure to ensure recoverable taxes remain recoverable > Use of drop-shipment rules if supplier non-resident not registered for GST/HST but importing into or sourcing in Canada > Non-resident rebate respecting installation services 28

15 Transaction Taxes & MCPs > PST on Components and Materials (BC, SK, MB) > Do any components qualifies for manufacturing production machinery & equipment PST exemption or other exemptions? > PST on contractors and subcontractors tools and equipment > Self-assessment obligation for machinery and equipment brought into province from another province or outside Canada > Non-resident contractors must post security with SK and MB, otherwise owner/general contractor must withhold from payments to non-resident contractor 29 Transaction Taxes & MCPs > Customs duties on components, materials, equipment, tools > Importer / Origin / Value-for-duty / Preferential Tariff / Availability of Remission, either in whole or in part > PST on Insurance Premiums (MB, ON, PQ) > Insurance Premium Taxes / Part I Excise Tax on Insurance obtained from non-resident or unlicensed insurer 30

16 Closing comments Consistent with commercial activities Facilitates project financing Facilitates entry/exit by partners Globally tax efficient Ideal tax structure 31