News of Note

SNF LP – Tax Court of Canada finds that nominees do not need to carry on business to issue valid invoices for ITC purposes, and that purchasers are at risk if they do not verify the registration numbers of suppliers

A Quebec LP (SNF) acquired metal scrap from 12 suppliers, who were registered for GST purposes, but who did not remit the GST which they invoiced to SNF. Each supplier named in the invoices was “a ‘prête‑nom’ and not the actual supplier” (i.e., each supplier acted on behalf of an undisclosed principal). Rip J stated:

That…suppliers may not have carried on a business or were "prête‑noms" does not, on the facts, affect the appellant's right to claim ITCs.

This may be inconsistent with an apparent CRA position that a nominee which does not carry on business cannot issue invoices in its own name which satisfy the documentary requirements for ITCs.

Rip J also found that SNF was not entitled to ITCs in the case of one of the suppliers because it did not meet the following standard:

[A] registrant purchasing supplies or services from a person must use reasonable procedures to verify that the person is a valid registrant, that the registration number actually exists and that the number is registered in the name of that person. In addition, if the registrant suspects the person's legitimacy as a supplier, then the registrant purchases supplies at its own risk. SNF suffered such risk when it dealt with Ms. Bergeron.

In a similar vein, he also stated that there can be no entitlement under ETA s. 261 to a rebate for "an error caused by the [applicant's] own inattention and carelessness." This condition is not stipulated in the section.

Neal Armstrong. Summaries of SNF L.P. v The Queen, 2016 TCC 12 under Input Tax Credit (GST/HST) Regulations – intermediary, ETA s. 169(4) and s. 261.

Nuvo Research butterfly includes amalgamation of transferee corporation

Nuvo Research, a small-cap TSX pharmaceutical company, is proposing to effect a butterfly spin-off of its drug development business (and retain its more mature cash-positive drug business). Similarly to the DeeThree spin-off of Boulder Energy, and in contrast to the FirstService/Collier butterfly spin-off, apparently no tax ruling was sought, no indemnities are being given respecting post-Arrangement actions that might cause the butterfly to be taxable and no tax risks are disclosed.

Unusually, the transferee corporation will amalgamate with the distributed subsidiary as part of the butterfly Plan of Arrangement. As the amalgamated corporation (Crescita) cannot be the transferee corporation (see Read), this means that the butterfly reorganization is intended to finish before the amalgamation (see 1996 CMTC Roundtable, Q. 16).

Similarly to the other two recent butterflies, the U.S. tax disclosure contemplates that the reorganization can be treated as a qualifying Code s. 355 distribution on the basis of the form of the transactions being disregarded – and (with less than excessive zeal) states that “it would be reasonable for U.S. Holders to take the position that Section 355 of the Code will apply.”

Neal Armstrong. Summary of Nuvo Research Circular under Spin-Offs and Distributions – Butterfly spin-offs.

CRA rules on plan marrying a US beneficiary’s objective of realizing a Code s. 331 capital gain on a redemption of bequeathed Canco shares (coupled with estate loss carried back under ITA s. 164(6)) and Canadian beneficiaries’ objective of a pipeline strip of Canco

CRA has often ruled that s. 84(2) will not apply to "pipeline" transactions in which shares of a private company (say, “A Co”), which have been stepped up on death without using the capital gains exemption, are sold by the estate to a new estate subsidiary (Newco) for a promissory note of Newco, Newco and A Co amalgamate a year later, the promissory note is repaid out of the Amalco assets over the following year and the proceeds thereof distributed by the estate to its resident beneficiaries.

A ruling dealt with the complications arising when one of the beneficiaries (“Child 2”) was a U.S. resident and A Co (a portfolio trading company) was a PFIC. The transactions contemplated that A Co redeems a portion of its shares held by the estate, thereby giving rise to a deemed dividend and to a capital loss which can be carried back under s. 164(6) to partially offset some of the terminal year capital gain on the A Co shares – and that such redemption proceeds are allocated and paid (less Part XIII withholding) by the estate to Child 2 through the issuance of a promissory note. The estate then engages in a conventional pipeline transaction (as described above) for the benefit of its resident beneficiaries.

The ruling letter indicates that an objective of the transactions “is to remove Child 2 as a shareholder of A Co in a manner that will ensure that he can receive any distribution from A Co as a capital gain for United States income tax purposes and avoid the complications and negative tax consequences resulting from being a United States resident shareholder of a PFIC.” (The estate acquired its A Co shares with a stepped up basis and they could then be disposed of with no gain being recognized, provided that dividend treatment was avoided through receiving Code s. 331 liquidation treatment.) Accordingly, all the transactions are being undertaken for Code purposes as a “Plan of Liquidation” of A Co, so that Child 2 can enjoy capital gains treatment under s. 331 on his distributions. Among other things, this is stated to depend on Amalco being “dissolved within a reasonable time” following the share repurchase by A Co – so that the transactions contemplate that Amalco will be dissolved fairly soon after the two-year period mandated by CRA for implementing pipeline transactions.

Rather curiously, the CRA ruling summary indicates that the principal issue is "whether estate can elect under subsection 164(6) where there is a non-resident beneficiary" – but no s. 164(6) ruling was given.

Neal Armstrong and Abe Leitner. Summaries of 2015 Ruling 2015-0569891R3 under s. 84(2) and s. 164(6).

CRA considers that it still is not required to give notice of its determination to register a taxpayer for GST purposes

New ss. 241(1.3) to (1.5) of the ETA contemplate that CRA can register a person whom it suspects of being required to be registered for GST purposes after giving 60 days’ notice, but with the effective date of the registration to be no earlier than 60 days after giving such notice. CRA considers that these provisions do not interfere with its current practice of simply assigning a GST/HST registration number to someone who should have been registered, and then assessing the person under that number for unremitted net tax – and notes that “CRA could still assess that person under paragraph 296(1)(a) of the ETA for unremitted net tax in respect of reporting periods prior to that person’s effective registration date.”

CRA also acknowledges that when the taxpayer is registered, it generally is entitled to claim input tax credits in its first post-registration return for GST that was previously incurred while it was a registrant (i.e., required to be registered.)

Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 23 under ETA s. 241(1.5) and of 26 February 2015 CBA Roundtable, Q. 33 under s. 169(1).

CRA indicates that the interpretation of “closely-related” for GST purposes should be informed by the policy that 90% common ownership is covered

ETA s. 128(1)(a) provides that two corporations are “closely related” if the first corporation owns 90% or more of the value and number of the issued and outstanding shares of the capital stock of the second corporation having full voting rights under all circumstances. Accordingly, it is obvious that if 100% of the voting shares and non-voting shares of Corporation C are held by Corporations A and B, respectively, Corporations B and C are not closely related. When asked about this CRA, rather than conceding the point, stated:

It is important to note that the explanatory notes to section 128… refer to a degree of common ownership of at least 90%. Furthermore, the determination of “closely related” is relevant for purposes of the elections under sections 150 and 156… . The explanatory notes to these provisions refer to wholly-owned corporations. Any application of the provisions of section 128… to a particular fact situation should be consistent with the policy intent of the provision.

This illustrates that on the GST side, CRA is generally more reluctant to concede that the ordinary meaning of the statutory wording, if unambiguous, controls the interpretation (see, e.g., Quinco), than for the Income Tax Rulings Directorate.

Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 20 under ETA s. 128(1)(a).