News of Note

2763478 Canada – Tax Court of Canada finds that not all the transactions in a value-shift scheme were infused with an estate-freezing purpose

An individual did not sell his shares of an operating company (Groupe AST) directly to a third-party purchaser. Instead he rolled his shares into a holding company (276), following which some internal transactions occurred in which the adjusted cost base of the Groupe AST shares was stepped up to fair market value - including a non-rollover drop-down of those shares to a subsidiary (9144) in exchange for high-basis common shares - with 276 realized corresponding capital gains. The Groupe AST shares were then sold to the purchaser at no additional gain.

276 then engaged in “value shift” transactions of the same general type as were struck down under GAAR in Triad Gestco and 1207192, i.e., a stock dividend of high-low preferred shares was paid on the high-ACB common shares that 276 held in 9144, thereby rendering those common shares almost worthless, and then the capital loss was realized by selling those common shares for $1 to a corporation owned by the son of 276’s shareholder.

Although, unlike Triad Gestco and 1207192, the capital gains – to be offset by the value-shift loss – were realized in internal transactions, this was not a relevant difference. In rejecting the taxpayer’s submission that there was no avoidance transaction as each transaction had an estate freezing objective, Paris J stated that although he accepted “that the global objective of the series was to effect an estate freeze,” one of the transactions was unnecessary from an estate freezing perspective.

Neal Armstrong. Summary of 2763478 Canada Inc. v. The Queen, 2017 CCI 98 under s. 245(3) and s. 245(4).

CRA indicates that a discretionary family trust may be unable to establish that expenses reimbursed by it were for the children’s benefit

A father who is the trustee of a discretionary family trust reimburses himself out of the trust funds for itemized expense of restaurant meals of the children and issues T3 slips to them.

CRA quoted its somewhat general statements in ITTN 11 (respecting trustee payments to children), which might be construed as consistent with this practice, but then quoted as “helpful” the statement in Degrace Family Trust that “the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee for a purpose which is unequivocally for the benefit of the beneficiary,” and also a statement in a 1999 technical interpretation that, where “the household expenditures [were] basically totaled and divided by the number of family members in order to determine the child’s share…it would be very difficult for the trustee to substantiate that the payments are unequivocally for the child’s benefit.”

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.10 under s. 106(6)(b).

CRA indicates that a Cdn competent authority agreement with the Cdn shareholder of an S Corp. extends to income of a qualified subchapter S Corp. subsidiary thereof

Art. XXIX(5) of the Canada-U.S. Treaty contemplates the Canadian-resident shareholder of an S Corp. agreeing with the Canadian competent authority that the income of the S Corp will effectively be attributed to him or her as foreign accrual property income, so that the U.S. taxes payable by that shareholder can be eligible for a foreign tax credit. CRA indicated that since the template S-Corp. agreements provide that the FAPI that is so attributed is the income of the S Corp. computed under the Code, such income will include the income of a qualified subchapter S Corp. subsidiary of the S Corp – so that there is no need for the Canadian shareholder to enter into a separate S-Corp. agreement respecting the QSSS.

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.9 under Treaties – Art. 29.

Income Tax Severed Letters 21 June 2017

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

CRA considers that there generally is no Treaty relief from double taxation for a Cdn-resident LLC with U.S.-source income and single Canadian-resident member unless it can elect to be an S-Corp

A single-member disregarded U.S. limited liability company (“SMLLC”), whose member is a resident of Canada, is factually resident in Canada and, thus subject to Part I tax, whereas U.S. source income (e.g., business income from a U.S. permanent establishment) would also be subject to U.S. income tax in the hands of the member, without the SMLLC being entitled to claim any foreign tax credit for such U.S. tax paid by its member.

Notwithstanding that from the U.S. perspective, the member is double-taxed on the same U.S. source income, CRA did not consider that there would be any potential redress under Art. 26(1) of the Treaty (re taxation not according with the Treaty).

If the member was a dual resident or U.S. citizen, and the LLC elected to be taxed as an S-Corp after electing to be taxable as a C-Corp, it would be subject to pass-through taxation for U.S. income tax purposes like a typical disregarded US LLC. However, the member might be able to request competent authority assistance pursuant to Art. 29(5).

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.8 under s. 125(1) and Treaties Art. 26 and Art. 29.

Six further full-text translations of CRA technical interpretations/Roundtable items are available

Full-text translations of five French technical interpretations and one (APFF) Roundtable item that were released between January 21, 2015 and January 14, 2015, are listed and briefly described in the table below.

These (and the other translations covering the last 29 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2015-01-21 23 December 2014 External T.I. 2013-0487791E5 F - Période d'amortissement du revenu d'emphytéose Income Tax Act - Section 248 - Subsection 248(1) - Disposition sum received on granting an emphyteusis is proceeds of disposition
Income Tax Act - Section 9 - Timing sum received on granting an emphyteusis is proceeds because it is not a lease
3 September 2014 External T.I. 2014-0523861E5 F - Clause pénale Income Tax Act - Section 9 - Compensation Payments any application of surrogatum principle to a penalty clause in a lease would depend inter alia on the lease and penalty terms
17 October 2014 External T.I. 2014-0532121E5 F - Frais professionnels - Divulgation volontaire Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees voluntary disclosure fees generally non-deductible
Income Tax Act - Section 60 - Paragraph 60(o) fees become deductible from CRA indicating it will reassess
1 October 2014 External T.I. 2013-0476081E5 F - Allocation pour une automobile Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) NPO drivers not taxable on $0.42 per kilometer received for driving services
25 September 2014 External T.I. 2014-0528211E5 F - Cotisation payée par l'employeur Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i) negotiated wage reduction in exchange for increased contributions to group sickness or accident insurance plan
2015-01-14 11 October 2013 APFF Roundtable, 2013-0495621C6 F - Changement usage - Duplex Income Tax Act - Section 45 - Subsection 45(2) duplex a single property

CRA confirms that an individual acting under a power of attorney is not engaged in commercial activity for GST/HST purposes

CRA indicated that as a power of attorney is an “office” for GST/HST purposes (which effectively is treated the same as employment for GST/HST purposes), an individual who charged for performing pursuant to a power of attorney was not engaged in a commercial activity, so that no GST/HST was exigible.

Neal Armstrong. Summary of 13 April 2017 Interpretation 162819 under ETA, s. 123(1) – office.

Final official answers to the 2017 IFA Roundtable have been published

Last week, CRA published in final form its responses to the questions posed at the April 2017 IFA Roundtable. Although these responses have already been mostly summarized, the following table, as a convenient reminder, lists and links these questions and responses and our summaries of the responses, and provides brief descriptors.

Summaries under Summary Descriptor
26 April 2017 IFA Roundtable Q. 1, 2017-0691071C6 - Interaction between s17 and s247 Income Tax Act - Section 247 - New - Subsection 247(7) s. 247(2) generally applies to boost the imputed cross-border interest arising under s. 17
Income Tax Act - Section 17 - Subsection 17(1.1) s. 17(1) does not oust application of s. 247(2)
26 April 2017 IFA Roundtable Q. 2, 2017-0691191C6 - Subsection 247(2) and FAPI Income Tax Act - Section 247 - New - Subsection 247(2) s. 247(2) not applied to a CFA earning FAPI if the transaction has been vetted under foreign OECD-based transfer pricing rules
Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f) s. 247(2) applies for FAPI purposes
26 April 2017 IFA Roundtable Q. 3, 2017-0691131C6 - U.S. LLPs and LLLPs Income Tax Act - Section 96 further extension of grandfathering relief for Florida and Delaware LLPs and LLLPs
Income Tax Act - Section 248 - Subsection 248(1) - Corporation general grandfathering of pre-April 26, 2017 LLPs and LLLPs
Treaties - Article 4 Florida and Delaware LLPs and LLLPs treated like LLCs
Income Tax Act - Section 93.2 - Subsection 93.2(2) Florida and Delaware LLPs and LLLPs subject to s. 93.2
26 April 2017 IFA Roundtable Q. 4, 2017-0691211C6 - App of s. 261(21) to loan with FA Income Tax Act - Section 261 - Subsection 261(20) application of s. 261(21) to deny a hedge of a U.S. dollar loan
Income Tax Act - Section 261 - Subsection 261(6.1) application of s. 261(21) to upstream USD loan to Cdn$ indirect parent
26 April 2017 IFA Roundtable Q. 5, 2017-0691121C6 - Foreign tax credit Brazilian interest on equity Income Tax Act - Section 91 - Subsection 91(4.7) s. 91(4.7) applies year-by-year based on actual dividend deductibility
26 April 2017 IFA Roundtable Q. 6, 2017-0691241C6 - T1134 filing issues Income Tax Act - Section 233.4 - Subsection 233.4(4) no provision of administrative relief from duplicative T1134 filing requirements resulting from amalgamations or CFA transfers
26 April 2017 IFA Roundtable Q. 7, 2017-0691221C6 - Clause 95(2)(a)(ii)(D) Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(a) - Subparagraph 95(2)(a)(ii) - Clause 95(2)(a)(ii)(D) - Subclause 95(2)(a)(ii)(D)(IV) - Sub-subclause 95(2)(a)(ii)(D)(IV)2 “income” includes “loss,” but s. 95(2)(a)(ii)(D)(IV)2 inapplicable re an LLC interest that is sold before year end
26 April 2017 IFA Roundtable Q. 8, 2017-0691141C6 - NR4 Reporting for non-taxable amount Income Tax Regulations - Regulation 202 - Regulation 202(1) NR4s are required even where there is no Part XIII tax
26 April 2017 IFA Roundtable Q. 9, 2017-0691201C6 - Computation of Earnings for LLCs Income Tax Regulations - Regulation 5907 - Subsection 5907(1) - Earnings - Paragraph (a) - Subparagraph (a)(iii) CRA’s new position, that LLCs generally must compute their income under ITA rather than Code rules, need not be applied for surplus calculations for pre-2016 years

CRA finds that a litigant receiving a court award of costs plus GST/HST is not required to report such tax

CRA considers that as court awards of costs (including any awards on a solicitor and client scale) “do not constitute consideration for a taxable supply or a service and do not form part of the consideration paid for the lawyer’s services of the winning party,” that party is not required to account for any GST or HST in computing its net tax for the reporting period in question, even where the award of such costs included a GST or HST amount.

The point, that the award does not represent compensation for services supplied by the winner to the loser (or the Court), is obviously correct. Of greater interest, this interpretation represents a restrictive and favourable interpretation of the requirement, in ETA s. 225(1) – A, that net tax of a person includes “all…amounts collected by the person…as or on account of tax.”

Neal Armstrong. Summaries of 3 April 2017 Interpretation 164742 under ETA s. 123(1) - supply and s. 225(3.1).

CRA finds that expenses incurred respecting a subsidiary unit trust are ineligible for ITCs unless incurred as management-services inputs

A parent corporation argued that it should be entitled to claim input tax credits for GST/HST on expenses incurred in relation to subsidiary unit trusts, on the basis that it was providing management services to them. In the absence of much background information on the management services, including not being provided with any management services agreements, CRA stated that “the nature of any management services provided by the Parent would have to be clarified to determine how any particular property or service could be considered to be an input into those services, before determining the extent that the property or service was acquired for the Parent’s commercial activities.”

In the absence of the consulting and other expenses in question qualifying as inputs to the Parent’s supply of management services, the Parent would not be entitled to ITCs therefor. For instance, the s. 186 rule (generally permitting a holding company to claim ITCs for GST/HST on expenses incurred in relation to its investment in a corporate subsidiary) was unavailable for investments in subsidiaries that were trusts rather than corporations.

Neal Armstrong. Summaries of 23 November 2016 Interpretation 165129 under ETA s. 141.01(2) and s. 186(1).