Archive for April, 2010

Q:  I live in Canada and am a Canadian citizen.  If I purchase a property in the United States will I be subject to United States taxes?

A: Yes.  If the US property which you own is rented, you will be subject to US income taxation on the rental income.  Even if you use the US property exclusively as a vacation residence, any US property owned at death will be subject to US estate taxation.

Q: How can I be subject to US income taxation when the expenses I am paying (for example, real property taxes, maintenance and upkeep, and mortgage interest) exceed the rental income I receive?

A: Absent special election, rents received by a person who is not a citizen or resident of the United States are subject to a withholding tax imposed at a 30% rate on the gross rental income (without reduction for otherwise deductible expenses associated with the property).

Q: How can I avoid the 30% withholding tax?

A: The United States revenue laws allow owners of US real estate who are not citizens or residents of the United States to elect to be treated as engaged in a US trade or business.  The election creates an annual obligation to file a US income tax return but allows the non-US investor to compute his or her US income tax liability on a net basis (reducing gross rental income by deductible expenses including depreciation).

Q: If I do not lease or rent my property to others, do I have any US tax obligations?

A: Yes.  If at your death you own US real estate, you will be subject to a US estate tax.

Q: How is the US estate tax different than the tax which I pay to Canada at my death?

A: US estate tax is different in many respects from Canada’s deemed disposition at death tax.  Two of the most important differences are, first, the rates at which US estate taxes are imposed: Federal rates range from 18% to 45%, plus the state in which the property is located may also impose a state estate tax.  Second, US estate taxes are assessed on the entire fair market value of the property.  In contrast, Canada’s deemed disposition at death tax only taxes the gain that would be realized if the property were sold.

Q: I can avoid the taxes that I would otherwise pay to the Canada Revenue Authority at my death simply by leaving the property which I own to my spouse.  Will this avoid US estate taxes, as well?

A: No, unless your spouse is a US citizen.

Q: Are there any strategies which will allow me to avoid US estate taxes?

A: Yes.  However, taking advantage of these strategies requires planning.  In order for that planning to be successful, in many cases it must be undertaken before the US property is purchased.

Q: How can I find out what I should do to avoid US income taxes and US estate taxes?

A: It is imperative that you consult a tax advisor experienced in US tax matters, preferably a lawyer or accountant with a practice based in the United States that advises non-US persons regarding ownership of US real estate.

Tags: United States property, United States taxation, US property, US taxation

This is the first in a series of posts on this subject.
The full version of the article is published in the Verdict,
a publication of the Trial Lawyers Association of B.C. .

New Rule 7-1 will replace existing Rule 26(1) by mandating a two-step process for obtaining discovery of documents.  This will, no doubt, have a significant impact on counsel’s role in the discovery process and on legal ethics governing that role.  It may well be that some of that impact is quite unanticipated by those who framed the new rule.

The eventual effect of the new rules and particularly of Rule 7-1 on professional responsibility is not yet known.  As far as this author is aware, the substantive content of new Rule 7(1) is novel and has not previously been enacted in any other jurisdiction, although past rule changes and their interpretation in the United Kingdom may provide some guidance on the approach our courts may take in overseeing the new regime for production.

Current Rule 26(1):  Production based on Relevance

The current Rule 26(1) requires production of documents that are or have been in a party’s possession or control “relating to every matter in question in the action”.  This wording tracks the test set out in Compagnie Financiére du Pacifique v. Peruvian Guano Co. (1882), 11 Q.B.D. 55 (C.A.) which has been applied in British Columbia subject to certain reservations imposed by McEachern CJSC (as he then was) in a series of decisions in the early 1980s.

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Tags: document discovery, New Rules, Rule 7-1

The British Columbia Securities Commission issued reasons on Thurdsay, April 8, 2010 for its recent decision not to enter the fray of a takeover battle for Yukon-based Crew Gold Corporation.

In the midst of a take-over battle between Russian-based Severstal Gold NV and Grand Cayman-based Endeavour Financial Corporation, Severstal asked the BC Securities Commission to compel TSX-listed Endeavour to comply with Canadian take-over bid requirements (Instrument MI-62-104 – Take-over Bids and Issuer Bids).

Pending that determination Severstal applied to the Executive Director to issue temporary order under section 161(2) of the Securities Act prohibiting Endeavour from trading Crew securities until a hearing was held to consider the issues raised by Severstal in its application.   The application was investigated quickly and 9 days later, the Executive Director issued a reply declining to intervene.

In last Thursday’s reasons,  the Securities Commission made short shrift of Severstal’s application to review that refusal, doing so both on procedural and substantive grounds.

Procedurally, the Commission applied Alberta and B.C.  law that the Executive Director’s discretion whether to issue such a temporary order is not subject to a review to the Commission under section 165(3) of the Securities Act.    It is not reviewable since the failure to make an order is not the same as a “decision” of the Executive Director which would be subject to statutory review.  Furthermore,  Severstal was held not to have standing to apply for a cease-trade order in that situation.

Although it could have simply dismissed Severstal’s application on procedural grounds, the Commission went one step further, in a move which is a caution to parties involved in a take-over battle not to use the Commission as a tool to manipulate a market battle without good reason.   The reasons underlying Severstal’s application were first, that recent Endeavour purchases in the marketplace were made with insider information; and second that having acquired more than 20% of the target company the purchases constituted a take-over triggering a regulatory process.  Severstal had itself announced a plan to make its own take-over bid at a price below what became the rising market price.

The Commission was obviously miffed with Severstal’s serious allegations of insider trading when it did not produce a shred of evidence to support it; the Commission expressed “concern” over that false allegation.    There had also been no ”take-over bid” triggering the Canadian regulatory process, since Endeavour’s purchases of Crew Gold stock were made offshore and not from sellers “any of whom is in the local jurisdiction”.

I view the Securities Commission’s willingness to expand its decision to cover substantive issues, and its rebuke over false inside trading allegations, as indicative of its disinclination to be used as a tool by which public companies may seek to use securities regulation to manipulate natural market forces. 

This is the fourth and final post in a series of posts on this subject. The full version of the article was published by the Institute of Corporate Directors in its Journal and and as a web resource.

Bad Faith and Self-Dealing

I would not allow corporations to exonerate directors in the event of bad faith, self-dealing or other instances of non-loyalty.

In the event the directors’ action is challenged, it will be the court’s job to determine whether the board’s decision was in fact taken disloyally.  This may involve review of the substance of a business decision made by an apparently well motivated board for the limited purpose of assessing whether that decision is so far beyond the bound of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.  Delaware law shows that the courts are capable of making a reasoned distinction.

In the event of a conflict of interest, directors’ approval of a transaction can be set aside even where it had been subsequently approved by the shareholders after the conflicts of interest were disclosed.  Directors in such a case would be obliged to prove that the shareholders were fully informed and that the process was transparent in all respects.

As discussed in the Delaware Disney litigation involving its former president, Michael Ovitz, a “failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.”

A good example of a gross negligence claim without a bad faith component is seen in the proposed sale of the Lear Corporation: Lear Corporate Shareholder Litigation. A deal was struck with a potential suitor under which he would increase his offer by some $90,000,000 on the condition that the company pay him a $25,000,000 termination fee if the shareholders voted “no”. After the deal was rejected and the termination fee was paid, the plaintiffs alleged that the transaction was entered into in bad faith in that it had been a virtual certainty that the offer would be rejected by shareholders.  The Court once against struck the lawsuit because there were no facts indicating that the directors consciously acted in a manner contrary to the interests of Lear and its stockholders.

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Tags: director liability

In a case being heard before the B.C. Supreme Court this week, a mortgagee who has discharged its security  is seeking to now assert priority over funds previously posted in court to secure a lien claim.

Background

Section 24 of the Builders Lien Act (“BLA”) provides that a person against whose land a claim for lien has been filed, may apply to court to have the claim of lien canceled by giving sufficient security for the payment of the claim.

In order to complete pending sales of the strata units, the developer in this case brought an application under section 24 seeking to cancel a claim for lien upon posting the required security.  The order was eventually made -  with the consent of the lien claimant – and the claim for lien was discharged.  In the evidence before the court, no mention was made of the mortgagee or of the source of those funds to be posted in court.

Once the claim for lien was canceled from title, the strata unit sales closed and, and despite the fact that the mortgagee’s loan was never fully repaid by the developer, it entirely discharged its security from the each strata lot.  No foreclosure proceedings were commenced.

In due course, the lien claimant commenced proceedings to enforce its claim for lien and for payment out of court of the security that had been posted.  The mortgagee has now brought an application claiming that, although it has completely discharged its security, it is entitled to the funds posted in court in priority to lien claimant.  The mortgagee relies on section 32 of the BLA.

Issue before the court

The court must decide whether a mortgagee can take advantage of section 32 of the BLA to create a security interest for it in funds posted in court to secure a claim for lien.

It is the author’s opinion that a mortgagee has no right to claim an interest in funds posted as security for the claim of lien.  A mortgagee’s security is in the land, and an order under section 24 of the BLA does nothing to interfere with that security; it merely creates a separate fund to secure a lien claimant.  The mortgagee got what it bargained for.

Tags: builder's liens, Construction, development, mortgagee