War Stories III: Staggered Closings in Canada

Transcription

1 War Stories III: Staggered Closings in Canada Aircraft Financing Subcommittee, 2009 Spring Meeting Vancouver, BC Carlo Vairo, Partner, Aerospace Group, Cassels Brock & Blackwell LLP

2 NOVATIONS Under Canadian law, a novation is the replacement of a contract with a similar contract with another party In aircraft financing/leasing, this often occurs where an aircraft is sold with a lease in place 2

3 NOVATIONS (cont d) Existing owner/lessor sells the aircraft and transfers all of its rights and obligations under the lease (except for rights and obligations which have accrued up to the effective time) to new owner/lessor of the aircraft Lessee will release existing owner/lessor from its transferred obligations by way of a novation agreement 3

4 TAX ISSUES IN CANADA If title to an aircraft passes and delivery occurs in Canada, the supply will be made in Canada and goods and services tax at the rate of 5% ( GST ) will be payable on the sale unless - the non-resident seller is not carrying on business in Canada for the purposes of the Excise Tax Act (the ETA ) and -is not registered for GST purposes 4

5 TAX ISSUES IN CANADA (cont d) Whether a non-resident person is carrying on business in Canada for the purposes of the ETA is question of fact preferable for title to pass and delivery of airframe and engines to be outside Canada 5

6 TAX ISSUES IN CANADA (cont d) If lessor/lender is deemed to carrying on business in Canada for the purposes of the Income Tax Act (the ITA ) or the ETA or is registered or required to be registered under the ETA, Canadian GST may apply in respect of lease payments and certain ITA and ETA filing and payment requirements may also be triggered a result a non-resident lessor wants to avoid 6

7 THE GST WINDOW When title passes and delivery occurs outside of Canada, the aircraft is reimported back into Canada and GST (currently at 5% of the FMV of the aircraft) will become payable by the importer of record (usually lessee) at the time of importation and the importer may be entitled to claim an input tax credit ( ITC ) (tax refund) 7

8 THE GST WINDOW (cont d) Typically, if the novation occurs in lessee s GST reporting period (usually the last week of the month), lessee can offset the ITC against GST collected and payable, resulting in no GST payment required to be funded 8

9 THE GST WINDOW (cont d) If the novation does not occur in this GST window, then lessee will look to existing lessor and/or new lessor to reimburse them for the cost of funds required for the payment of GST until refunded 9

10 THE AIRCRAFT If the contract engines are on wing the airframe, scheduling of the closing is relatively straightforward The airframe and contract engines are often separated and apart, especially if the aircraft has been on lease for a few years 10

11 THE AIRCRAFT (cont d) For tax reasons, all three aircraft, i.e. the airframe and each airframe with a contract engine on wing, have to be outside of Canada at time of title transfer Airlines prefer that these transfers occur as close to the same time as possible (for admin and insurance reasons) This creates scheduling issues as getting all three airframes outside of Canada and over a tax friendly jurisdiction close to the same time is challenging 11

12 REQUIREMENTS FOR NOVATIONS 1. Effective time, transfer of title and payment of the purchase price for each of the airframe and each contract engine must be while such component is outside of Canada and over a tax friendly jurisdiction 2. Transfer should preferably occur during GST Window 12

13 THE SOLUTION: STAGGERED CLOSINGS Transfer title to and novate the lease in respect of each of the airframe and offwing engines separately as they are outside of Canada within the shortest time frame as possible Requires co-operation by lessee regarding scheduling of the aircraft 13

14 THE SOLUTION: STAGGERED CLOSINGS (cont d) Appropriate amendments to the purchase agreement and novation agreement required Escrow agreement required to ensure title passes and the allocable purchase price paid for each component at the relevant effective time 14

15 DOCUMENTATION Purchase agreement and novation agreement to provide for possible staggered closing Each of the airframe and off-wing engines sold and lease novated in respect of such component at a different time, i.e. there is an allocable purchase price, an effective time and a bill of sale entered into for each component 15

16 DOCUMENTATION (cont d) Key document is escrow agreement between existing lessor, new lessor and escrow agent (and, if financing, existing lender and new lender) 16

17 ESCROW AGREEMENT New lessor pays the entire purchase price to escrow agent in advance of closing pursuant to an escrow agreement The escrow agreement is required so that when the applicable effective time occurs: 17

18 ESCROW AGREEMENT (cont d) 1. The applicable portion of the purchase price is automatically and without requirement of further instruction applied to the purchase price and paid to or held on the account of seller 2. The documents relating to such component previously delivered in escrow shall be automatically released 18

19 ESCROW AGREEMENT (cont d) 3. If there is financing on the aircraft, the applicable portion of the purchase price is paid to lender and lender releases its security interest in that component and new lender perfects its security interest therein 4. The airframe should always close first before any off-wing engine to best deal with any unlikely contingencies 19

20 CLOSING LOGISTICS AND STEPS Step 1: All documentation signed and purchase price delivered in escrow Step 2: Scheduling call with lessee regarding location of aircraft Step 3: Aircraft close and lessee completes Chief Dispatcher Certificates confirming the time and location of each aircraft (airframe and each airframe with off-wing engines attached thereto) 20

21 AIRFRAME 2:00 EDT AIRFRAME CLOSING 21

22 OFF-WING ENGINE #1 CLOSING OFF-WING ENGINE #1 3:00 EDT 22

23 OFF-WING ENGINE #2 CLOSING OFF-WING ENGINE #2 4:00 EDT 23

24 OVERLAPPING CONSIDERATIONS Insurance: Insurance certificates to cover both existing lessor/lender and new lessor/lender interests during staggered closing process 24

25 OVERLAPPING CONSIDERATIONS (cont d) Security Interest Registrations: Filings can be made pre-closing (to the extent possible) and existing filings discharged post-closing Parties to acknowledge security interests not released or effective in the applicable component until actual effective time of closing 25

26 OVERLAPPING CONSIDERATIONS (cont d) Transport Canada Aviation Filings: Filings are made post-closing and are dated on the date of the closing of the airframe 26

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