Tax Interpretations Judicial and CRA interpretations of Canadian tax law and transactional implications

News of Note

A registrant which has been charged GST on a commercial real estate purchase should promptly apply for a rebate

Where a registrant pays GST on a commercial real estate purchase, CRA considers that the correct approach is for the registrant to apply under s. 261 for a rebate for GST paid in error, rather than to purport to offset that tax by claiming an input tax credit.  Such ITC instead is an offset to its self-assessment obligation for the GST under s. 228(4).

Requiring the registrant to apply for a rebate is potentially problematic as the time limit for the rebate claim is two years after payment of the GST.

Neal Armstrong.  Summary of 25 February 2014 Memo 155876 under ETA s. 221(2).

A services recipient’s contracting address is “most closely connected” with the supply for GST/HST place-of-supply purposes

A supply of services generally is made for HST purposes in the province corresponding to the home or business address of the recipient obtained by the supplier in the ordinary course of business – or, where there is more than one such Canadian address, then the address which “is most closely connected with the supply.”  CRA has stated, more clearly than in some previous interpretations, that “the business address of the recipient from which the supplier is hired pursuant to the agreement for the supply (the “contracting address”) is generally the address that is most closely connected with the supply.”

Neal Armstrong.  Summary of 3 February 2014 Interpretation 126057 under New Harmonized Value-added Tax System Regulations, s. 13(1).

CRA recharacterizes a Sharia-compliant financing arrangement as a secured loan to the Islamic client

Under a Sharia-compliant real estate financing arrangement that is somewhat analogous to a reverse repo, the Islamic client pays cash for X% of the property, and FinanceCo pays for (100-X)% of the property subject to a secured “repurchase” obligation of the client to buy that interest for cost plus an accruing “profit” amount.  In a somewhat apodictic interpretation, CRA stated that provided the client is liable under the arrangement to pay for the property, the applicable GST/HST is its liability rather than FinanceCo’s.  By inference, CRA is prepared to treat the client as in substance being the purchaser of the property at the time of its acquisition.

Neal Armstrong.  Summary of 18 February 2014 Interpretation 155500 under ETA  - s. 228(4).

The 12-month period for an installation PE should stop running when work at the project is suspended for external reasons

The OECD Model Treaty states that “a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.” Hourdin suggests among other things that:

  • As Art. 5(3) applies on a project by project basis, “it is therefore possible for an enterprise resident in a state to operate in another country on a significant scale, in terms of cumulative time and total volume of business, without having a PE.”
  • An example of the application of the OECD commentary statement that “a building site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent whole commercially and geographically,” is the installation of a country-wide radar sytem for use by air traffic controllers even where there are “10 separate contracts with 10 airport companies.”
  • Although the OECD commentary states for purposes of the 12-month test that “a site should not be regarded as ceasing to exist when work is temporarily discontinued,” this rule "should allow for a suspension of the 12-month period if the taxpayer provides sufficient evidence of total interruption of work because of external reasons.”

Neal Armstrong. Summary of Pierre-Marie Hourdin, "Is the Construction PE Clause in the OECD Model Treaty Satisfactory?", Tax Notes International, July 21, 2014, p. 229 under Treaties – Art. 5.

CRA does not consider the change-of-use rules to apply to conversions of depreciable property to inventory

CRA has published its statement made at the 2013 Annual CTF Conference that it will not follow the statements in C.A.E. that the change of use rules apply to the conversion of inventory to depreciable property or vice-versa, so that CRA will not be changing its general position on the change in use rules in IT-102R2 and IT-218R.

Neal Armstrong.  Summary of 26 November 2013 Annual CTF Roundtable, Q.2, 2013-0493811C6 under s. 45(1)(a).

First Quantum acquisition of Lumina uses tainting nominal cash for the share consideration alternative, and provides for cashless option surrenders

Lumina Copper shareholders can elect to receive First Quantum shares or cash for the acquisition of their shares subject to proration to keep the overall cash/share mix essentially fixed.  Similarly to the Loblaw acquisition of Shoppers Drug Mart, those who elect solely for First Quantum shares also are required to receive $0.01 per share in cash, so that Canadian taxable shareholders who want rollover treatment must elect under s. 85 with First Quantum.  Built into the Plan of Arrangement is a compulsory cashless surrender of Lumina stock options, so that the holders receive Lumina shares equal to the in-the-money value of their options.

Neal Armstrong. Summary of Lumina Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash, or Shares.

Sulliden/Rio Alto merger is structured to qualify as a s. 368(a) reorg

Sulliden Gold, whose principal asset is a Peruvian subsidiary holding a development property, is effecting a s. 86 spin-off to its shareholders of a Quebec exploration subsidiary (SpinCo) before its outstanding shares are transferred to Rio Alto Mining on a s. 85.1 exchange for Rio Alto shares.

In order that this transaction likely can qualify as a s. 368(a) reorganization under the Code, Rio Alto will then transfer the Sulliden shares to a newly-incorporated Rio Alto sub so that they can amalgamate. Although this will occur as a conventional “continuation” style amalgamation, the U.S. disclosure considers that a “substantially all” requirement must be satisfied, which implies that the transaction is viewed as a reverse triangular merger under s. 368(a)(2)(E) rather than as a forward triangular merger governed by s. 368(a)(2)(D).  This “substantially all” requirement is expected to be satisfied based in part on the distributed Quebec subsidiary representing less than 10% of Sulliden’s net assets.

A 1992 temporary PFIC regulation indicates that the transaction would not qualify for nonrecognition given that Sulliden is a PFIC and Rio Alto is not.  The disclosure suggests that the transaction nonetheless should qualify for nonrecognition if these regulations are not finalized in their current form, notwithstanding that the statute itself (in s. 1291(f)) provides that to the extent provided in regulations a disposition of PFIC shares will be taxable even if it would otherwise qualify for nonrecognition: the disclosure considers that the statute is not self operative.

Neal Armstrong and Abe Leitner.  Summary of Rio Alto Circular under Mergers & Acquisitions – Mergers – Share-for-share.

CRA considers that settlement of a withdrawing partner’s interest with partnership property will not scupper the s. 98(6) rollover

The rollover under s. 98(6) for the replacement of a Canadian partnership by another partnership with the same or fewer partners requires that all of the property of the predecessor partnership be transferred to the new partnership.  CRA considers that this requirement will be satisfied even though partnership property was paid out to a withdrawing partner whose departure caused the new partnership to arise at law – provided that all of the property of the old partnership was transferred directly by it to the new partnership immediately after the settlement of the withdrawing partner's interest.

Neal Armstrong.  Summary of 30 June 2014 T.I. 2014-0522181E5 F under s. 98(6).

CRA finds that a non-resident partnership breaks a closely-related group connection for HST/GST purposes

Among other requirements for the HST/GST nil consideration election, those electing must be specified members of a “qualifying group” of corporations or Canadian partnerships which are closely related.  This means that two Canadian corporations which are sisters by virtue of being at the bottom of a wholly-owned stack of immediate Canadian and more remote U.S. corporations which, in turn, have a common US parent, will be eligible as members of a qualifying group.  However, if there instead is a US partnership in one of the two chains, this will break the required connection, so that the election is not available. It is implicit in this that partners of a partnership do not own partnership property including a corporate subsidiary.

Neal Armstrong.  Summary of 4 February 2014 Interpretation 159039 under ETA – s. 156(1) – qualifying group.

CRA ignores its archived Bulletin on lease cancellation payments

IT-359R2 (Archived) dated 20 December 1983 states that unless “renting property forms part or all of a business being carried on” by the tenant, an “amount received by a tenant… from a landlord, permitting the cancellation of a lease is a capital rather than an income receipt to the recipient.”

Crisp writing like this is an embarrassment to CRA a generation later. When asked about the treatment as an income or capital receipt of a lease cancellation payment received by a tenant, CRA ignored IT-359R2 and referred instead to the general discussion in IT-365R2, paras. 8 and 9 of the surrogatum principle.

Neal Armstrong. Summary of 23 June 2014 T.I. 2014-0519401E5 under s. 9 – compensation payments.

What's Currently in Progress

  • Commentaries for the Income Tax Act provisions for which there are numerous judicial interpretations have to date been posted up to section 9 (with a cleaning-up of related summaries of judicial decisions). Commentaries on other provisions are being added on an ad hoc basis.
  • Income tax severed letters released after 1 October 2012 have been uploaded.
  • We are behind in summarizing HST/GST interpretations; accordingly, Excise Tax Act materials are not up to date.

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