News of Note
Finance comments on the new GAAR rules
Email this ContentPoints made by Trevor McGowan on the new GAAR rules included:
- The introduction of the economic substance rule in s. 245(4.1) was intended to counter what may be an existing default approach towards dealing with economic substance, arising from the Canada Trustco, of considering that a lack of economic substance is generally irrelevant, unless the provisions otherwise indicates - so that economic substance now is relevant.
- The tests in s. 245(4.1)(a) to (c) need to be applied holistically to the transactions as a whole.
- Other than the change of indicating that economic substance has some relevance (which he would not want to portray as an inconsequential change) there is essentially no change to the GAAR analysis.
- He provided a detailed run-down of why the typical exchangeable share deal would satisfy the economic substance tests in s. s. 245(4.1).
- He did not state that there is no general due diligence defence (see Consolidated Canadian Contractors and progeny) to the new penalty (in addition to the narrow defence in s. 245(5.2)), even though invited to comment on this point.
Neal Armstrong. Summary of 26 November 2023 CTF Conference - "The Future of the GAAR" under s. 245(4.1).
PepsiCo - Federal Court of Australia finds that part of the purchase of concentrate by an Australian bottler from an Australian PepsiCo company was a trademark royalty
A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (“SAPL”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to SAPL for bottling and sale, and granted SAPL the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (“PBS”) to SAPL. There was a similar arrangement for the licensed bottling and sale by SAPL of Gatorade pursuant to an EBA with another U.S. company (“SVC”).
The definition in Art. 12(4) of the Australia-U.S. treaty (the “DTA”) of “royalties” referred inter alia to “payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any … trademark.”
Moshinsky J found that Australia was permitted under the DTA to impose withholding tax of 5% on a portion of the purchases paid by SAPL to PBS (essentially determined by him to be 5.88%, based on expert evidence as to licensing “comparables”) on the basis that it constituted consideration for the use, or right to use, the trademarks to which PepsiCo or SVC were beneficially entitled, stating:
[W]hile the payments made by SAPL were, on their face, payments for the purchase of concentrate, this is not determinative of their characterisation for the purposes of Art 12(4) … .
PepsiCo and SVC nominated PBS to be the seller of the concentrate under the EBAs for the relevant years. This constituted a direction to SAPL to pay PBS rather than PepsiCo or SVC … .
PepsiCo and SVC … were entitled to receive the payments under the EBAs and directed SAPL to pay PBS. In these circumstances, PepsiCo and SVC were beneficially entitled to the relevant portions of the payments.
Neal Armstrong. Summary of PepsiCo, Inc v Commissioner of Taxation [2023] FCA 1490 under Treaties – Income Tax Conventions – Art. 12.
CRA rules that the domestication of an exempted Bermuda limited partnership under the DRULPA does not entail dispositions or the creation of a corporation
CRA ruled that the “domestication” of an exempted Bermuda limited partnership to become a limited partnership governed by the Delaware Revised Uniform Limited Partnership Act (the “DRULPA”) did not entail a disposition by the partnership of its property or by the members of their partnership interests, notwithstanding that the partnership did not have separate legal personality under Bermuda law, and acquired such personality under the DRULPA.
CRA accepted a representation that the partnership activity (of holding shares of subsidiaries) was carried on in common with a view to a profit and that the partnership was considered a partnership for purposes of the Act prior to the domestication transaction, and ruled that following the domestication, the partnership will be treated as a partnership for purposes of the Act. This suggests that a limited partnership governed by the DRULPA is a partnership rather than a corporation (see also 2006-0216451I7 F).
Neal Armstrong. Summaries of 2023 Ruling 2022-0950461R3 under s. 248(1) – disposition and s. 96.
GST/HST Severed Letters June 2023
This afternoon's release of four severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their June 2023 release) is now available for your viewing.
CRA indicates that participation in Canadian board meetings by telephone from outside Canada is not the exercise of the office in Canada
Regarding non-resident directors who participate outside Canada and by telephone at board meetings of a resident corporation held in Canada, CRA stated:
[A] non-resident director located outside Canada who participates in a meeting of the board of directors of a corporation resident in Canada held in Canada by means of a telephone system, or by means of any other telecommunications system, generally does not thereby realize income from an office or employment exercised in Canada. In those circumstances, the telephone system, or any other similar system, appears to us to be used as a means of transmitting services rendered from outside Canada.
CRA further indicated that, in the context of the directors not previously having been Canadian residents, their fees also would be exempted from withholding under Reg. 104(2).
Neal Armstrong. Summary of 17 December 2018 Internal T.I. 2016-0659031I7 F under s. 115(1)(a)(i) and Reg. 104(2).
CRA indicates that the conferral of a benefit on a non-resident sister by bearing the Part XIII tax on a royalty paid to it, is non-taxable
Canco was assessed for and paid Part XIII tax regarding royalty payments that it made to its non-resident parent (Parentco) and to a non-resident subsidiary of Parentco (Sisterco), and did not seek to recover that tax from them. Should s. 15(2) be applied on the basis of each non-resident owing it for the applicable tax?
CRA adverted to 2006-0214291I7, which effectively indicated that the unrecovered payment of Parentco’s Part XIII tax constituted a taxable benefit subject to ss. 15(1) and 214(3)(a), but that ss. 56(2) and 214(3)(a) did not apply to the unrecovered payment of Sisterco’s Part XIII tax because such payment would not be included in the non-resident’s shareholder’s income if Part I were applicable to it. The Directorate then found that Canco conferred a benefit on Parentco and Sisterco rather than Parentco and Sisterco having become indebted to Canco.
In the case of Parentco, this implied a taxable benefit pursuant to ss. 15(1) and 214(3)(a). However:
[T]he amount of Part XIII tax paid by Canco on behalf of Sisterco would not be included in computing the income of Sisterco under subsections 15(1) or (2) because, respectively, on the one hand, Sisterco is not a shareholder of Canco and, on the other hand, Sisterco would not be considered to a have received a loan from or become indebted to Canco.
Neal Armstrong. Summary of 21 June 2023 Internal T.I. 2017-0720181I7 under s. 214(3)(a).
Income Tax Severed Letters 6 December 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that an advisor’s reimbursement of a client for the client’s costs in reviewing a proposed life insurance policy purchase was an s. 12(1)(x) inclusion
On a client agreeing to acquire a life insurance policy from an advisor, the advisor agreed to repay the client for the accounting fees the client had incurred for the review of the policy. CRA indicated that such payment generally would be deductible in computing the advisor’s income under s. 9, and that the reimbursement would be included in the client’s income pursuant to s. 12(1)(x) (and that such inclusion would apply even if the client did not proceed to acquire the policy).
The above was consistent with 2010-0359401C6 (where instead the advisor paid a cash rebate to the client).
Neal Armstrong. Summary of 28 September 2023 CLHIA Roundtable Q. 2, 2023-0971711C6 under s. 12(1)(x).
CRA states that a no-cost endorsement to a life insurance policy to add benefits could be a disposition
CRA did not concede that an endorsement to provide a new benefit under an exempt life insurance policy for no cost and without any underwriting requirement, to a defined set of policyholders, would not constitute a disposition, and instead stated that whether there was a disposition turned on whether the changes made were “so fundamental as to go to the root of the policy” and that “[w]here a policy is silent with respect to a particular type of change, the amending of the policy, if a material change, could result in a disposition of the existing policy and the acquisition of a new policy at law.”
Neal Armstrong. Summary of 28 September 2023 CLHIA Roundtable Q. 1, 2023-0971701C6 under s. 148(9) – disposition.
MMV Capital – Federal Court of Appeal applies Deans Knight regarding acquiring an approximate 100% interest in a Lossco with no change of de jure control
A venture capital corporation (MMV) acquired 49% of the voting common shares of the respondent while in interim bankruptcy proceedings and subscribed $1,000 for a large number of non-voting common shares giving it over 99.8% of all the common share equity. It then financed taking the respondent out of bankruptcy proceedings at a modest cost, and transferred a loan portfolio of U.S.$86 million to the respondent, effectively in consideration for secured debt and preferred shares, thereby reducing the equity interest of the five arm’s length holders of 51% of the MMV voting common shares to less than 0.01% and also permitting the use of the respondent’s non-capital losses.
In applying Deans Knight to reverse the Tax Court finding that there was no abuse of s. 111(5), Monaghan JA stated:
The object, spirit and purpose of subsection 111(5) – its rationale – is “to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders”.
As in Deans Knight, what happened here is exactly what subsection 111(5) seeks to prevent.
Regarding the respondent’s submission that the original five voting common shareholders still could have exercised their de jure control to elect a new board that would pay them dividends, she noted that MMV could at any time retract its preferred shares and demand on its loan to deplete the respondent of all its assets, so that “while their common shares provided the five original shareholders with de jure control, they had no effective way to use that control to benefit from the respondent’s losses.”
Neal Armstrong. Summary of The King v. MMV Capital Partners Inc., 2023 FCA 234 under s. 245(4).
Neal H. Armstrong editor and contributor