News of Note

Income Tax Severed Letters 21 February 2018

This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Five full-text translations of 2013 APFF Roundtable items and Technical Interpretations are available

The table below provides descriptors and links for two items from the October 2013 APFF Roundtable, as fully translated by us – as well as for three technical interpretations released in January 2014.

These (and the other full-text translations covering the last 4 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2014-01-15 15 October 2013 Internal T.I. 2013-0491951I7 F - Travaux en cours au moment du retrait d'un associé Income Tax Act - Section 34 no new s. 34 election required if s. 98(6) or (5) applies/election can be made in income reconciliation
12 November 2013 Internal T.I. 2013-0497611I7 F - Feuillet T1204 Income Tax Regulations - Regulation 237 - Subsection 237(2) T1204 disclosure applicable only where contract with federal supplier and includes travel reimbursements as “services” consideration
11 October 2013 APFF Roundtable, 2013-0496511C6 F - Actions prescrites Income Tax Regulations - Regulation 6205 - Subsection 6205(2) simultaneous freezes by arm's length shareholders for their respective families to not qualify because the respective trusts/beneficiaries are not NAL with each freezor
11 October 2013 APFF Roundtable, 2013-0495691C6 F - Clause restrictive Income Tax Act - Section 56.4 - Subsection 56.4(1) - Eligible Interest must be one, rather than more than one, underlying corp
Income Tax Act - Section 56.4 - Subsection 56.4(3) - Paragraph 56.4(3)(c) non-solicitation clause/divergence of covenanter and seller
Income Tax Act - Section 56.4 - Subsection 56.4(7) - Paragraph 56.4(7)(b) non-solicitation clause could be treated as part of a non-compete
Income Tax Act - Section 56.4 - Subsection 56.4(7) - Paragraph 56.4(7)(f) maintenance of Holdco fmv/divergence of seller and covenanter
2014-01-08 10 December 2013 External T.I. 2013-0480771E5 F - Winding-Up of a Corporation Income Tax Act - Section 88 - Subsection 88(2) deemed year end under s. 88(2)(a)(iv) is only for surplus computation purposes

RCF IV – Federal Court of Australia finds that gains of U.S. limited partners from sales of an Australian resource company were not Treaty exempt but were not TCP-type gains

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. The gains were held to be on income account given that this investment was handled consistently with the LPs’ modus operandi, which was to “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit,” and were derived from an Australian source given inter alia that RCF personnel were active board members. Before finding that the U.S.-resident partners’ share of the partnership gains from selling the shares of Talison Lithium were not exempted under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 (as expanded in Australian domestic legislation) for dispositions of (deemed) real property situated in Australia, Pagone J found that such gains were from “entreprises of” the U.S. limited partners, stating that this expression encompassed “a passive investment activity.”

The appeals of RCF IV and RCF V (regarded effectively as appeals of their component U.S. partners) nonetheless were allowed on the basis that the shares of Talison Lithium were not taxable Australian real property because their value was attributable more to the “downstream” lithium processing operations than to the “upstream” mining operations.

The same approach might also be applicable to determining whether shares of a Canadian mining company are “taxable Canadian property” (whose definition, unlike the Australian TARP definition and the definition of “Canadian property mutual fund investment” in Part XII.2 of the ITA) uses “derived from” rather than “attributable to” language.

Neal Armstrong. Summaries of Resource Capital Fund IV LP v Commissioner of Taxation [2018] FCA 41 under Treaties – Income Tax Conventions – Art. 3, Art. 13, s. 248(1) – taxable Canadian property – (d), s. 115(1)(a)(ii), s. 9 – capital gain. v. profit – shares, General Concepts – stare decisis, s. 152(1).

Viterra – Tax Court of Canada finds that consequential ETA reassessments are subject to essentially the same limitations as under the ITA

CRA reassessed a company well beyond the normal reassessment period in order to allow input tax credits, which it previously had denied within the normal reassessment period (being GST on fees charged by the investment manager for employee pension plans), but made an offsetting addition of GST to the reassessment on the basis that the company was resupplying the investment management services to the pension plans and had failed to charge GST on the fees therefor imputed by CRA.

CRA argued unsuccessfully that ETA s. 298(3) was less limiting than ITA s. 165(5), so that it was “not precluded from reassessing on the basis of different transactions or even from increasing net tax.” D'Arcy J instead found that s. 298(3) was quite similar to s. 165(5), stating that CRA could not use it “to increase the net tax of the GST registrant or to take into account different transactions that the ones that formed the basis of the reassessment that was made within the statutory reassessment period.”

However, here it was unclear that the reassessment of the resupply did not relate to the same transaction as the previous assessment of the third-party manager supplies, so that he left it to the trial judge to sort this out (this being a Rule 58 application that was devoid of evidence).

Neal Armstrong. Summary of Viterra Inc v. The Queen, 2018 TCC 29 under ETA s. 298(3).

CRA finds that an interest-free loan from a CFA of Canco to a NR sister of Canco was subject to Part XIII tax

A foreign subsidiary of Canco (Opco) in turn wholly-owned a non-resident “Finco,” which made an interest-free loan to a non-resident sister of Canco (Foreign Sub), that was repaid within two years. As the loan was not exempted under the inter-foreign affiliate exemption in s. 80.4(8), the deemed interest-free benefit imputed under s. 80.4(2) was, in turn, deemed by s. 15(9) to be a benefit conferred on “a” shareholder, which CRA interpreted as being Foreign Sub. S. 214(3)(a) then deemed this benefit to be paid “to the taxpayer as a dividend from a corporation resident in Canada.” CRA considered Foreign Sub to be the “taxpayer” and effectively treated Finco as the deemed corporation resident in Canada, so that Finco was liable under s. 215(1) for failure to “withhold” and remit Part XIII tax on the imputed benefit.

CRA then noted that this tax liability of Finco could attach under s. 160(1) to dividends that flowed up the chain to Canco. There also was potential liability of the directors of Finco under s. 227.1 (so that in establishing a due diligence defence, they might have to explain how they could have missed such palpably obvious points of Canadian tax law.)

No mention of Oceanspan or principles of territoriality. CRA doubtless was focused on the fact that value was leaving the Canco silo, but note that under its technical analysis, CRA was purporting to impose s. 215(1) liability on a foreign person (Finco) in respect of a deemed benefit that was conferred by it on another non-resident (Foreign Sub).

Neal Armstrong. Summaries of 16 August 2017 Internal T.I. 2015-0622751I7 under s. 15(2.9), s. 160(1) and s. 227.1(1).

CRA generally will accept amended business-limit assignments under s. 125(3.2) where the limit was initially indeterminate

Under the “specified corporate income” (SCI) rules in s. 125, active business income earned by a Canadian-controlled private corporation (the “second CCPC”) from providing services or property to a non-arm’s length person described in the SCI rules is not eligible for the small business deduction (SBD). However, such excluded income may still be eligible for the SBD if another CCPC (the “first CCPC”) that receives services or property from the second CCPC assigns a portion of its business limit (not exceeding the excluded income that the second CCPC earned from the first CCPC in its taxation year in which the first CCPC’s taxation year ended) to the second CCPC pursuant to a prescribed form filed with its return.

CRA was asked to address the situation where the taxation year of the second CCPC (on November 30) ends 11 months after the taxation year of the first CCPC (on December 31), so that at the time for filing the prescribed form, the first CCPC cannot yet know what is the maximum permitted business limit assignment. Would the CRA accept an amended BL assignment when the actual amount can be determined? CRA responded:

[A] reasonable effort to compute an amount would be required at the time of filing the first CCPC’s tax return. When the actual amount is known (e.g., after November 30, 2018), a revised BL assignment would generally be accepted by the CRA, provided that the tax year is not statute-barred.

Neal Armstrong. Summary of 29 January 2018 External T.I. 2017-0713051E5 under s. 125(3.2).

An unrelated CRA assessment of a business limit assignee might invalidate that assignment

The above post on 2017-0713051E5 notes that CRA has a solution (through filing an amended business-limit assignment) when at the time required for the first CCPC to file the assignment it does not yet know what is the maximum permitted assignment amount because the year end for the second (assignee) CCPC has not yet been determined. A similar issue has not yet been addressed by CRA, namely, that the income of the second CCPC might subsequently be reduced due to an assessment (e.g., because CRA applied s. 67 to deny the deductibility to the first CCPC of fees charged to it by the second CCPC – see 2012-0440071E5). This income reduction would retroactively reduce the allowed BL assignment amount, which might invalidate the assignment,

At some point, CRA presumably will be asked whether in this situation as well, an amended assignment can be filed.

Neal Armstrong. Summary of Dino Infanti, "Assignment of Small Business Limit Creates Filing Headaches," Tax for the Owner-Manager (Canadian Tax Foundation), Vol. 18, No. 1, January 2018, p 3 under s. 125(3.2).

Income Tax Severed Letters 14 January 2018

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Morrison – Federal Court of Canada finds that CRA appropriately denied s. 163(1) penalty relief for failure to notice the accountant’s T4 omission

The taxpayer's accountant inexplicably failed to include a T4 for $47,770 in the taxpayer’s return. In confirming that CRA’s decision to deny penalty relief was reasonable, Campbell J indicated that CRA had appropriately focused on the taxpayer’s “responsibility to exercise care to ensure that all income was reported, and to supply evidence that he was prevented from doing so.” It thus is generally incumbent on the taxpayer to review the return (see also Chiasson).

Neal Armstrong. Summary of Morrison v. Canada (Attorney General), 2018 FC 141 under s. 220(3.1).

Solar Power v. ClearFlow – Ontario Superior Court finds that a “discount fee” was interest

A typical loan made by the lender (ClearFlow) to the borrower bore base interest rate of 12% p.a. compounded monthly, an administration fee that was charged when the Loan was initially advanced, and each time it renewed (of, say, 1.81% of the loan balance), and a “discount fee” of 0.003% per day of the outstanding principal. McEwen J found that the administration fee was not interest (it “was compensation for the considerable costs incurred to negotiate, conduct due diligence, set-up, and administer the Loans, and was not simply compensation for ClearFlow not having the use of the money”).

However, the discount fee was interest – as to which he stated his acceptance of the conclusion in Sherway Centre that “an amount paid as compensation for the use of money for a stipulated period can be said to accrue day-to-day.”

He went on to find that because the discount fee was interest, s. 4 of the Interest Act capped the total loan interest at 5% p.a. A clause, that purported to comply with s. 4 by effectively providing a verbal formula for multiplying the stipulated rate by 365 (or 366, as applicable), did not suffice. Furthermore, the formula was defective in that it excluded the effect of compounding.

For a borrower whose business in not money-lending or something similar, the distinction between a fee and interest informs whether deductibility of a lender's charge is to be analysed under s. 20(1)(e) or (e.1), or under s. 20(1)(c).

Neal Armstrong. Summary of Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONSC 7286 under s. 20(1)(c).