News of Note
Iberville Developments – Federal Court of Appeal confirms that the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)
A corporate taxpayer having shopping centres with a cost amount and fair market value of $14M and $130M, respectively, contributes the properties under s. 97(2) to a newly-formed LP in consideration for boot of $14M and units with a FMV of $116M. This is a barter exchange so that on general principles, the cost of the units is $116M. S. 97(2)(b) provides that “immediately after” the disposition of the property to the LP, the elected amount of $14M minus the boot of $14M “shall be added” to the ACB of the partnership interest, so that such interest’s ACB is now increased by that amount (which, on these numbers, is nil). The shopping centres are shortly thereafter sold to third parties at a gain (reflecting their low rollover basis), with such gain (mostly, capital gain) allocated to the partners (mostly, to the taxpayer). Subsequently, the partnership is wound up, and the taxpayer realizes a capital loss of around $116M.
Noël CJ agreed with Boyle J below that transactions only somewhat more complex than this did not produce a double adjustment to the ACB of the units under general cost principles and under s. 97(2)(b), as described above. After noting that such a double increase would represent “an absurd result,” Noël CJ stated:
[T]he appellant’s partnership interest had already been acquired when the shopping centres were transferred, thereby eliminating any possibility that, in addition to the subsection 97(2) adjustment, the partnership interest could be increased under section 54 by the “cost”, i.e. the fair market value, of the transferred property … .
In other words, the taxpayer only had a 100% partnership interest both before and after the drop-down transactions (“the Act tracks the partnership interest as a whole rather than as individual units”), so that there was no cost for an increased partnership interest on the drop-downs (there was no such increase), and the only cost base adjustment to be made on the s. 97(2) drop-downs were under s. 97(2)(b).
What if no s. 97(2) election is made? He stated:
Upon transferring capital property to a partnership under subsection 97(1), a partner triggers the application of subparagraph 53(1)(e)(iv) which provides that the adjusted cost base of a partner’s partnership interest is increased by an amount commensurate with its contribution. The fact that the partner receives units in exchange for the properties is not relevant to the computation of the adjusted cost base of its partnership interest as Subdivisions C (capital gains) and J (partners and partnerships) do not recognize the issuance of new units in a partnership as a tax event or changes in the relative interest in a partnership as the acquisition of distinct property.
Thus, it would appear that the issuance of partnership units on a drop-down is irrelevant to the ACB of the partnership interest, whether the drop-down occurs on a non-rollover basis under s. 97(1) or a rollover basis under s. 97(2).
McMahon v Grant Thornton – Scottish Court of Session (Outer House) finds that an accounting firm was not liable for not suggesting exit tax planning before it was too late
A Scottish entrepreneur (Mr McMahon, or the “pursuer”) sued his accounting firm on the basis that it had failed to advise him to transfer some of his shares of a car dealership company to his wife at least one year before his sale of those shares, so as to enhance access to the UK “entrepreneursʼ relief” (providing a capital gains exemption). The engagement letter with the accounting firm, which was for tax compliance services, stated:
We cannot accept a duty to monitor and unilaterally suggest tax planning advice on specific matters. Advice on the tax implications of such specific matters will be given once you have referred it to us.
Lord Doherty stated that this clause did not have the effect of excluding the raising of tax planning ideas that were “reasonably incidental” to the work included within the tax compliance work retainer. However, he found:
[U]ntil the sale was unexpectedly proposed the pursuer had made it very clear to the defender over a number of years that he had no interest in discussing an exit strategy, and that he had no intention of selling his shares in the business.
In addition, the amount of the capital gains relief had only recently been substantially increased, so as to make spousal transfer planning worthwhile.
Lord Doherty indicated that, once the sale was proposed, he was “not persuaded that the pursuer would have run the risk of delaying the sale in order to implement the idea” of waiting a year so that planning could have been implemented to enhance the entrepreneurs’ relief. The action against the accounting firm was dismissed.
Neal Armstrong. Summary of McMahon v Grant Thornton UK LLP  CSOH 50 (Court of Session (Outer House)) under General Concepts – Negligence.
Taxpayers may treat the pandemic as an opportunity to engage in a “refreeze” transaction, i.e., resetting the redemption amount of freeze preferred shares to accord with the corporation’s current reduced value. In addition to the more obvious valuation issue, a more technical point to be mindful of is that if the initial freeze transaction was subject to the attribution rule in s. 74.4(2), the resulting deemed interest benefit will not be reduced on the refreeze transaction.
Further, if the refrozen preferred shares are redeemed, the "outstanding amount" will apparently be reduced only to the extent of the value of the refrozen shares. Thus, the freezor may technically be deemed to continue receiving "phantom" interest income, even after all outstanding preferred shares are redeemed.
Neal Armstrong. Summary of Alexander Demner and Nicholas McIsaac, “Freezes and Refreezes: Opportunities and Risks in the Era of Self-Isolation,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 5 under s. 74.4(3).
See also Manu Kakkar, Alex Ghani, Boris Volfovsky, "Corporate Attribution: Refreeze May Cause Unsolvable Corporate Attribution Problem", Tax for the Owner-Manager, Vol. 18, No. 3, July 2018, p.6.
We have published a further 5 translations of CRA interpretations released in June and May, 2010. Their descriptors and links appear below.
These are additions to our set of 1,214 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for July.
K E Entertainments – U.K. Supreme Court finds that correcting computations of consideration for supplies did not decrease consideration for VAT purposes
A UK bingo club operator was subject to VAT, not on its gross sales proceeds for access to its sessions of games, but only on the net sum retained after deduction of winnings. HMRC issued a notice stating that bingo promoters who (like the taxpayer) had been calculating this net sum on a game-by-game rather than session-by-session basis, could make a claim for having overpaid VAT, which the taxpayer did. (A game-by-game calculation produced more tax because a negative net take on a game could not be deducted from the positive net take on other games.) However, it was precluded by statute from going back more than three years with its refund claims – but there was no such time limitation where a repayment of VAT was claimed based on there being “a decrease in consideration for a supply.” The taxpayer unsuccessfully argued that its change in calculating the consideration for its supplies involved a “decrease in consideration,” so that it could go back more than three years. Lord Legatt stated:
What is required … is a change in the consideration actually received by the supplier. … All that has happened is that the taxpayer has had second thoughts about how the consideration received at the time of the supply should be analysed for tax purposes.
A similar issue could arise under ETA s. 232, which provides for a potential GST/HST reduction where, after GST/HST has been charged on the consideration for a supply, “for any reason, the consideration … is subsequently reduced.”
Lord Legatt also found that it was “clear that there can be only one correct method of calculating the taxable element of fees charged to customers for playing cash bingo and … this was the session by session method and not the game by game method” (stating that there was no reason “for going behind the pricing policy adopted by the taxpayer and treating the fee charged to participate in a session of bingo as if it were a bundle of separate fees charged for the rights to play separate games”). He was pleased to find that there was only one correct method, stating:
In matters of taxation consistency of approach is of critical importance. If the same exercise of apportionment may lawfully be carried out in more than one way, the result is likely to be that different taxpayers whose situations are identical will lawfully pay different amounts of tax. That offends the principle of equal treatment. It is also capable of distorting competition between businesses.
Neal Armstrong. Summaries of The Advocate General (representing Revenue and Customs) v K E Entertainments Ltd (Scotland)  UKSC 28 under ETA s. 232(2), s. 123(1), s. 141.01(5) and Statutory Interpretation - Equal Treatment.
Treaty-exempt non-resident employers may be entitled to CEWS assistance for non-resident employees only intermittently in Canada
It is suggested that, on a literal reading, a U.S. resident that was not subject to Canadian income tax by virtue of not having a permanent establishment here and that employed U.S. employees mostly in the U.S. but also on an intermittent basis (say several days a quarter) in Canada, so that it had a Canadian payroll remittance account, and that had the requisite decline in qualifying revenue, could potentially claim a CEWS wage subsidy for the full amount of its U.S. employees’ salaries during the qualifying period. Granted, amounts paid at any time by an employer to an employee at a time that the employer is a "qualifying non-resident employer" and the employee is a "qualifying non-resident employee" are excluded from “eligible remuneration” for CEWS purposes. However:
If NR Co chooses not to file an application pursuant to paragraph 153(7)(a) to be classified as a qualifying non-resident employer, or is not eligible to be considered a qualifying non-resident employer for some other reason (for example, failing to comply with the requirements of the certified non-resident employer program), it would be liable to withhold, but it would be eligible for the CEWS.
Neal Armstrong. Summary of Alex Ghani, Stan Shadrin, and Boris Volfovsky, “How Does the Canada Emergency Wage Subsidy Apply to Non-Resident Employers?,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 4 under s. 125.7(1) - eligible remuneration.
CRA rules on loss shift from public Lossco to its SFI Profitco sub through creation, drop-down and wind-up of new Lossco
CRA provided standard rulings (including provincial GAAR rulings) on proposed transactions for the transfer of losses from a public Lossco to its direct subsidiary Profitco, which was a specified financial institution. The mechanics entailed Lossco incorporating a “NewLossco” and a “Newco”, and then using proceeds of a daylight loan to fund NewLossco with an interest-bearing loan, with NewLossco subscribing for prefs of Newco and Newco making a non-interest-bearing loan back to Lossco. The dividends on the prefs were to be annually funded by Lossco pursuant to a “capital support agreement.”
Once this triangular loss-shifting arrangement was unwound (on a cashless basis), NewLossco would be dripped down into Profitco under s. 85(1), and wound up into Profitco. A representation is made that:
The Proposed Transactions are not being undertaken to refresh non-capital losses or facilitate the use of such losses in a taxation year after the taxation year in which the losses would have otherwise expired in the hands of Lossco.
The representations respecting the amounts involved not being commercially unrealistic did not seem to be especially stringent.
Neal Armstrong. Summary of 2020 Ruling 2019-0819971R3 under s. 111(1)(a).
An affiliated group of eligible entities may all elect under s. 125.7(4)(b) for their qualifying revenue for CEWS (wage subsidy) purposes to be determined on a consolidated basis. The definition of an “eligible entity” is broader than that of a ”qualifying entity,” so that an individual controlling an Opco could jointly elect with the Opco even though the individual did not have a payroll remittance number. This could be helpful to Opco if, for example, the individual sustained a significant decrease in interest income during the testing period.
However, since the joint election must be made with all group members, the qualifying revenue of each one should be examined – for example, the passive income of the individual’s spouse.
Neal Armstrong. Summary of Martin Lee and Thanusan Raveendran “Affiliation Election for CEWS: Private Corporation Applications,” COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 3 under s. 125.7(4)(b).