News of Note

CRA states that a non-resident lender consent fee is not an administration fee and treats non-resident dealer board attendance as services rendered in Canada

Canco paid “consent fees” (calculated as a percentage of the amount owing) in order to obtain the consent of arm’s length non-resident lenders to a sale of its shares to a non-resident purchaser. Before finding that the fees were not subject to Part XIII tax as a management or “administration” fee or charge, or on any other ground, the Directorate noted that at the time of the original introduction of s. 212(1)(a), the Minister of Finance had stated (even before getting to the exclusions in s. 212(4)) that “a management or administration fee or charge is to be regarded as an amount paid for advice or direction pertaining to the operation or administration of a company, not including an amount paid for services to an independent firm.”

Canco had also paid fees of a non-resident dealer for assistance in structuring the transaction, finding purchasers, evaluating their offers and coordinating due diligence. Regarding Reg.105 withholding, CRA stated that “it would appear that at least some of the services, particularly meeting with the Board of Directors would be provided in Canada,” and referred to its comment in IC 75-6R2, para. 32 that “The portions allocated to the services to be performed inside and outside Canada must be clearly expressed either within the contract or through the related information and documents.”

Neal Armstrong. Summaries of 30 March 2017 Internal T.I. 2016-0636721I7 under s. 212(1)(a) and Reg. 105.

Montminy – Federal Court of Appeal finds that employees enjoyed the ½ deduction on exercising their stock options notwithstanding an immediate sale of the acquired shares to the controlling shareholder

When a third-party purchaser agreed to acquire all the assets of Opco, the management employees agreed with the 100% shareholder of Opco (“Holdco”) that on the asset sale closing date, they would exercise their options to acquire common shares of Opco and immediately sell their newly-acquired shares to Holdco for an agreed cash sale price.

The Crown accepted that this right to sell their shares to Holdco was a fair market value liquidity right described in Reg. 6204(2)(c), so that the shares were not prevented from being prescribed shares under Regs. 6204(1)(a)(iv) and (vi) (re right for their shares to be acquired by a specified person, i.e., Holdco). However, D’Auray J in the Tax Court had accepted the Crown’s submission that the shares were tainted under Reg. 6204(1)(b).

In allowing the taxpayers’ appeal, Noël CJ found that Reg. 6204(2)(c), by providing that the taxpayers’ right to sell their shares to Holdco was to be ignored for purposes of Reg. 6204(1), had the effect of also deeming there to be no reasonable expectation under Reg. 6204(1)(b) of such an acquisition occurring within two years of the options’ exercise. He also found that providing the ½ deduction under s. 110(1)(d) to the taxpayers accorded with the broader context of the stock option rules. In particular, the taxpayers had been fully at risk during the lengthy period of their holding of their options to fluctuations in Opco’s value.

Neal Armstrong. Summary of Montminy v. Canada, 2017 FCA 156 under Reg. 6204(1)(b).

CRA considers the possibility that a portion of redemption proceeds could be treated as a dividend under Barbados corporate law

The s. 90(2) rule, which deems a pro rata distribution received on a foreign affiliate share to be a dividend, does not apply to a “distribution made…on a redemption …of the share.”

Canco held the preferred, but not the common, shares of a Barbados International Business Company (“FA”), and its preferred shares were redeemed. Although the relevant facts are mostly redacted, it would appear that the resolution pursuant to which FA redeemed the shares provided that a portion of the proceeds paid on the redemption was a dividend, and Canco apparently relied on this wording rather than making a s. 93(1) election. The Directorate stated:

If there is only, as a matter of law, a redemption and cancellation of shares, or if there is no conclusive evidence as to whether there is, in part, a dividend, we would generally view all such amounts as having been received as proceeds from the disposition of the… Shares, and no amount as having been received as a dividend.

This seems to imply that the Directorate was amenable to the possibility that, with the right corporate-law treatment, the proceeds could in part be a dividend even though they were all paid “on a redemption …of the share[s].”

The Directorate also stated:

If there is, in part, a dividend… to the extent the purpose of issuing the...Shares is to skew exempt surplus to the Canadian shareholder…consideration [should] be given as to the potential application of subsection 95(6) and/or subsection 245(2).

Neal Armstrong. Summary of 11 April 2017 Internal T.I. 2016-0670541I7 under s. 90(2).

Income Tax Severed Letters 19 July 2017

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

Ontario Ministry of Finance proposes to end the transparency of mutual fund trusts and SIFT partnerships for LTT purposes

The Ontario Ministry of Finance has released (with a comments-due date of August 28, 2017) a proposed modification to the Ontario land transfer tax rules for dispositions of beneficial interests in Ontario real estate by some trusts and LPs and their unitholders.

“Group 1” vehicles will themselves be treated as separate LTT taxpayers and, thus, be required to pay LTT on their beneficial acquisitions – and conversely acquisitions or redemptions of interests in Group 1 vehicles will no longer trigger LTT. Group 1 vehicles are:

  • SIFT trusts and partnerships as defined for ITA purposes;
  • mutual fund trusts the units in which are eligible for the MFT unit exemption (as described in the current Regulation); and
  • pension trusts which are exempt under ITA s. 149(1)(o).

No exemption for REIT mergers is mentioned.

A "Group 2" vehicle is an ITA s. 108 unit trust, or a partnership that has filed (or is required to file) a declaration under the Ontario Limited Partnerships Act (and not the Act for any of the other provinces) - which, in either case, has had over 49 arm's length unitholders or partners. Unitholders or partners of Group 2 vehicles will have the same substantive liability for direct or indirect beneficial transfers as before. Although the Group 2 vehicle itself will continue to be a flow-through for such purposes, it will become an LTT collector and be required to collect and remit LTT calculated at the unitholder or partner level - and will be authorized to collect such amounts from them through withholding from distributions. If it collects an insufficient amount, it will be subject to a penalty of at least the amount it failed to collect. (It is not clear whether this is intended to be effectively a double imposition, so that the Ministry might still go after the unitholders as well.)

No changes are proposed in the treatment of other trusts or partnerships.

At the time of title registration, nominees will be required to disclose the legal names and business registrations numbers of the partnerships or trusts for whom they now hold title.

Neal Armstrong. Summary of Ontario Ministry of Finance Proposal 17-MOF010, posted 14 July 2017 “Facilitating the Payment and Administration of the Land Transfer Tax under Section 3 of the Land Transfer Tax Act” under Ontario Land Transfer Tax Act, s.3(1).

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

Full-text translations of the three French technical interpretations released last week, and of the three (APFF) Roundtable item released on December 30 and 23, , 2015 are listed and briefly described in the table below.

These (and the other translations covering the last 31 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2017-07-12 6 April 2017 External T.I. 2016-0658841E5 F - Purpose tests and Allocation of safe income Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) safe income was allocated between 2 classes of participating shares pro rata to their dividend entitlements
Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) s. 55(2) did not apply to dividends paid only for asset protection and QSBC-status purposes
21 November 2016 Internal T.I. 2016-0675761I7 F - Obligation de produire un T4A Income Tax Regulations - Regulation 200 - Subsection 200(1) artists’ union must issue T4A slips to incorporated artists respecting benefits received from the union
6 June 2017 External T.I. 2015-0617331E5 F - TFSA - Exempt Contribution Income Tax Act - Section 207.01 - Subsection 207.01(1) - Exempt Contribution - Paragraph (b) payment of family-law debt out of TFSA to surviving spouse would occur as a consequence of the deceased’s death
Income Tax Act - Section 248 - Subsection 248(23.1) - Paragraph 248(23.1)(a) payment of family-law obligation of deceased to surviving spouse out of deceased's TFSA could qualify
Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(a) legacy of residue (which included the residence) could be satisfied with TFSA of deceased
2014-12-30 10 October 2014 APFF Roundtable, 2014-0538241C6 F - 75(2) and definition of "earned income" in 146(1) Income Tax Act - Section 75 - Subsection 75(2) character preservation of attributed income/basis adjustment for denied capital loss at trust level
Income Tax Act - Section 146 - Subsection 146(1) - Earned Income character preservation of s. 75(2) attributed income
Income Tax Act - Section 40 - Subsection 40(3.6) basis adjustment for denied capital loss (otherwise subject to s. 75(2) attribution) at trust level
2014-12-23 10 October 2014 APFF Roundtable, 2014-0538261C6 F - Disposition of capital interest/personal trust Income Tax Act - 101-110 - Section 107 - Subsection 107(2) issuance of note by trust is not distribution of trust property
Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Cost Amount note issuance is not trust property distribution to a beneficiary
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) non-deductible interest on note issued to beneficiary
10 October 2014 APFF Roundtable, 2014-0538221C6 F - Day Trading in RRSP Income Tax Act - Section 146 - Subsection 146(4) RRSP/RRIF day-trading of qualified investments is exempt

Mullings – Tax Court of Canada finds that time spent administering special “medical formula” foods to a child counted as therapy administration and not as dietary control

The taxpayer’s ability to claim the disability tax credit in respect of her young child, who suffered from an inability to digest a common amino acid (“Phe”), turned on whether she was spending at least 14 hours per week on therapy, which was defined in s. 118.3(1.1)(d) to exclude “time spent on dietary…restrictions or regimes.”

Keeping such a child’s bodily levels of Phe within a narrow range (failing which there will be severe brain damage) requires that “medical formula [food] is given in very precise doses four times a day and administering it is no different from administering any other prescription medication.” Since “measuring and controlling Phe intake is properly characterized as administration of the therapy and not as control of X’s diet,” the time so spent counted towards the 14 hours. The taxpayer got the credit.

Neal Armstrong. Summary of Mullings v. The Queen, 2017 TCC 133 under s. 118.3(1.1)(d).

The Canadian pension fund world has become less idyllic with the MLI PPT, and Finance suggestions for extending thin cap and SIFT rules

It is now well-settled that an s. 149(1)(o.2)(iii) investment corporation is not itself required to satisfy the PBSRA rule limiting it investment in a person or affiliated or associated group to less than 10% provided that its parent pension fund does so.

More problematic is the potential introduction of rules to extend the thin capitalization rules to corporations in which tax-exempt entities invest, or to extend the specified investment flow-through rules to partnerships and trusts in which tax-exempt entities invest. In various situations, these rules could also adversely affect taxable investors who are co-investors with s. 149(1)(o.2)(iii) corporations.

Although s. 253.1 when read in conjunction with Consolidated Mogul provides substantial comfort that borrowing at the level of an investee LP is not problematic for the s. 149(1)(o.2)(iii) corporation, even greater comfort is afforded if a unit trust is interposed in between.

Pension plan investments in real estate are not generally made through an s. 149(1)(o.2)(iii) investment corporation but rather through an s. 149(1)(o.2)(ii) real estate corporation. Some of the strictures which otherwise would bind such a corporation may be avoided by leasing the corporation’s real estate to a lessee which carries on the activities in question.

The new principal purpose test in the MLI is potentially problematic for Canadian pension funds who are co-investing in Europe through an intermediate holding vehicle such as a Luxco.

Neal Armstrong. Summaries of Jack Silverson and Bill Corcoran, "Issues Affecting Investments by Canadian Pension Plans in Private Equity, Infrastructure and Real Estate in Canada, the USA and Europe," 2016 CTF Annual Conference draft paper under s. 149(1)(o.2)(iii), s. 149(1)(o.2)(ii) and MLI, Art. 7.

Pietrovito – Tax Court of Canada refuses to permit a taxpayer to correct a clear error in appealing only one of the two taxation years in dispute

Due to a clerical error by a liaison between the taxpayer and his counsel, counsel was only instructed to prepare a Notice of Appeal for Year 1 and not Year 2, notwithstanding that it was the obvious intention of the taxpayer to appeal both. Lafleur J declined to extend the Wells case to permit the taxpayer, following the discovery of this error, to amend his Notice of Appeal to extend the appeal to cover Year 2.

She also found that as the one year extension period under s. 167(5)(a) had long since passed, she could not waive the one-year period and rejected an argument that “on the basis of Hickerty, [2007 TCC 482] that where an appellant has taken positive actions to appeal and where that appellant reasonably believes that the appeal has been validly filed, the one‑year grace period had stopped running.”

Neal Armstrong. Summaries of Pietrovito v. The Queen, 2017 TCC 119 under s. 169(1) and s. 167(5)(a).

Club Intrawest – Federal Court of Appeal splits a service in relation to a cross-border vacation home portfolio into two geographic components

Under the usual approach to applying the GST single-supply doctrine, a Canadian-resident non-share corporation, most of whose members had time share points which entitled them to book stays at Canadian, U.S. and Mexican resort condos beneficially owned by the corporation, would have been found to be receiving its annual fees from them as consideration for a single supply of a service, namely, funding the operating costs of the time share program. This gave rise to a conundrum, as ss. 142(1)(d) and 142(2)(d) respectively deem a supply of a service in relation to real property inside Canada or outside Canada to be made in Canada or outside Canada – so that a single supply here, which would have related to both, would have been deemed to be made both inside and outside Canada.

Dawson JA resolved this dilemma by finding that in this unusual context of services in relation to a cross-border real estate portfolio, there were two supplies, so that the services in relation to the Canadian and foreign real estate were taxable and non-taxable, respectively:

I see no reason in principle that precludes splitting up the supply so that the supply is treated as two supplies in order to recognize that ultimately the services are inherently distinct in one important respect: the services relating to the operation of the vacation homes located in Canada are services in relation to real property situated in Canada and hence are a taxable supply – the services relating to the operation of the Intrawest vacation homes situated outside of Canada are services related to real property situated outside of Canada and hence are a non-taxable supply.

Neal Armstrong. Summaries of Club Intrawest v. Canada, 2017 FCA 151 under ETA s. 142(1)(d) and General Concepts – Agency.