News of Note
Centrica – UK Supreme Court finds that professional fees incurred in pursuing a subsidiary sale but before the deal was struck were capital expenditures
Email this ContentThe taxpayer, an intermediate UK holding company for subsidiaries in various countries, incurred fees of an accounting firm, Netherlands law firm and an investment banker in connection with the difficult process for accomplishing a share sale of, or an asset sale by, a Netherlands subsidiary (“Oxxio”). In rejecting the position of the taxpayer that such fees incurred between retaining those advisors on the prospective sale and the board meeting over a year later when the sale price to a purchaser was approved were incurred on income rather than capital account, Lady Simler stated (at para. 87):
[T]he clear objective purpose of the Disputed Expenditure was to assist in bringing about the disposal of an identifiable capital asset, namely the Oxxio business, in whatever form that transaction ultimately took. Money expended to achieve a disposal of a capital asset is properly regarded as being of a capital nature. … The fact that there was no certainty that the Oxxio business would be sold does not make the expenditure revenue in nature. … Indeed, expenditure on an abortive capital disposal transaction is capital expenditure nonetheless … .
Neal Armstrong. Summary of Centrica Overseas Holdings Ltd v Commissioners for His Majesty’s Revenue and Customs, [2024] UKSC 25 under s. 18(1)(b) – capital expenditure v. expense - asset disposal expenses.
Hill – Tax Court of Canada finds that employment income earned by a band member at a hospital located near the reserve was not exempted
A status Indian, who lived on a reserve and worked at a hospital a 10 minute drive away (on land just outside the reserve) was not exempted on her employment income. Graham J noted that, unlike Folster, there was no real relationship between her work and life on the reserve (e.g., most patients were not from the reserve). The location of the hospital on disputed lands (i.e., which the band might claim) did not have much significance given the absence of such a relationship.
Neal Armstrong. Summary of Hill v. The King, 2024 TCC 92 under Indian Act, s. 87.
3533158 Canada – Federal Court finds that CRA was justified in not assessing returns which had ITC claims that had gone stale due to CRA requiring the returns to be refiled
After the taxpayer (“353”) learned from CRA that its US parent had been incorrectly claiming input tax credits (ITCs) that should have been claimed by 353, 353 filed a single global GST/HST return covering the period from August 1, 2012 to August 31, 2016 without allocating the reported items between reporting periods. At the filing time, all the claimed ITCs were within the four-year limitation period in s. 225(4) for claiming ITCs. After being informed by CRA five months later that the global return could not be processed, 353 promptly filed quarterly returns covering the same period. Shortly thereafter, CRA informed 353 that it could not process the returns for the three quarterly reporting periods covering the period up to April 30, 2013 (the “initial three quarters”) because the GST/HST registration of 353 was effective only from December 1, 2014. This registration-date issue was not resolved until over three months later, when CRA changed the effective date of the registration to August 1, 2012.
353 then refiled the returns for the initial three quarters, and CRA then assessed 353’s returns – but apparently not the initial three quarters. It refused to issue refunds for those quarters on the basis that the related (corrected) returns had not been filed within the four-year ITC limitation period under s. 225(4)(b), but processed the refund claims for the other returns.
353 brought a mandamus application before the Federal Court to compel the Minister to grant refunds in respect of the initial three quarters.
Régimbald J found that 353 had failed to establish a clear right to its refund claims. In particular, s. 296(4)(b) precluded the Minister, when assessing, to refund an overpayment of tax (attributable to an ITC) if, on that assessment date, such ITC could not have been claimed on that date in a return. The refund claims for the initial three quarters did not satisfy this test because the ITC claims on which they were based were beyond the four-year limitation period set out in s. 225(4). Régimbald J rejected 353’s submission that s. 296(4) so applied only to ITCs that had never been claimed by the registrant (and only identified by CRA on audit) on the basis inter alia that this would be inconsistent with s. 296(4)(b) referencing ITCs (generally) rather than only “allowable credits”) (re “new” ITCs).
Régimbald J stated:
[U]nder subsection 296(4), if the ITC is still allowable within the limitation period under subsection 225(4) (regardless of whether it was claimed at the time or “discovered” during the assessment), the ITC can be refunded because it remains eligible at the date of the assessment. However, if on the date of the assessment, the ITCs are no longer allowable, then the Minister cannot refund.
The fact that CRA had not assessed the initial three quarters may have precluded 353 from being able to require CRA to allow the ITC claims for those quarters pursuant to s. 296(2) – see Pawlak. Régimbald J essentially found that CRA was justified in not assessing the initial three quarters on the basis that the related ITCs claims were barred by s. 296(4)(b) – but did not discus the “trumping” of this provision by s. 296(2).
Neal Armstrong. Summaries of 3533158 Canada Inc. v. Canada (Attorney General), 2024 FC 1090 under ETA s. 296(4)(b), s. 123(1) – registrant, s. 238(1), Interpretation Act, s. 32, Federal Courts Act, s. 18.1(2).
Income Tax Severed Letters 24 July 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in October and September of 2001. Their descriptors and links appear below.
These are additions to our set of 2,898 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2001-10-12 | 23 October 2001 External T.I. 2001-0074885 F - LOCAL DE TRAVAIL A DOMICILE | Income Tax Act - Section 8 - Subsection 8(13) - Paragraph 8(13)(a) | sales reps who performed most of their duties on the road could not satisfy s. 8(13)(a)(i) or (ii) |
| 2001-09-28 | 20 September 2001 External T.I. 2001-0070705 F - ETABLISSEMNT DOMESTIQUE AUTONOME | Income Tax Act - Section 18 - Subsection 18(12) | work premises attached to principal residence with the same municipal address likely were part of the individual’s self-contained domestic establishment |
| Income Tax Act - Section 248 - Subsection 248(1) - Self-Contained Domestic Establishment | self-contained domestic establishment is a living unit with restricted access containing a kitchen, bathroom, and sleeping facilities | ||
| 19 September 2001 External T.I. 2001-0086545 F - IMMEUBLE VENDU A PERTE | Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) - Subparagraph 13(7)(e)(i) | s. 110.6(19) election on building could result in subsequent terminal loss | |
| 11 October 2001 External T.I. 2001-0100245 F - POLICE EXEMPTEE ASSUREUR NON-RESIDENT | Income Tax Regulations - Regulation 306 - Subsection 306(1) | information required to verify that a policy issued by a non-resident insurer is an exempt policy does not exist | |
| Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) | s. 128.1(1) applicable to life insurance policy of non-resident insurer to a non-resident policyholder’s immigration | ||
| 2 October 2001 External T.I. 2001-0102655 F - T5008 - AGENT DE L'ACHETEUR | Income Tax Regulations - Regulation 230 - Subsection 230(2) | trader or dealer is not required to file a T5008 re purchases made for clients | |
| Income Tax Regulations - Regulation 230 - Subsection 230(6) | purchase made as agent does require filing a T5008 | ||
| 2 October 2001 External T.I. 2001-0100355 F - ALLOCATION DE RETRAITE ET REER | Income Tax Act - Section 146 - Subsection 146(5.1) | retiring allowance could be contributed both to the RRSP of the contributor’s spouse within the s. 146(5.1) contribution limit and to the contributor’s own RRSP using s. 60(j.1) |
CRA indicates that a bare trust has a calendar taxation year end, even if terminated before year end
The property held by a nominee corporation as the trustee of a bare trust is sold early in the year, the proceeds distributed on the termination of the trust, and the nominee then dissolved, also before December 31.
CRA indicated:
- Pursuant to s. 249(1), the bare trust would have a calendar taxation year for s. 150 purposes, so that its filing deadline for the T3 return would be 90 days after the end of the calendar year (before taking into account the CRA dispensation for bare trusts for their 2023 taxation years).
- Regarding the dissolved nominee, “[t]he trustee of a trust is responsible for filing a T3 return required under paragraph 150(1)(c), including Schedule 15 (where required by section 204.2 of the Income Tax Regulations), for the taxation year of the trust.”
It is difficult to make sense of the second point, but CRA evidently would want the return filed even with the trustee gone.
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 12, 2024-1005851C6 under s. 249(1)(c).
CRA confirms that AMT carryforward amounts cannot be utilized to reduce TOSI tax
S. 120.2(1) generally provides for the generation of a credit from the carryforward of an AMT amount based on the the extent of the excess of the Part I taxes for relevant subsequent year excluding TOSI taxes (and other amounts) over the AMT amount for that year. CRA confirmed that the effect of this TOSI exclusion in the computation is that if the only reason that there was an excess of Part I taxes over AMT in the subsequent year was because of TOSI tax, no application of the AMT carryforward could occur in that year – even if the reason for the AMT carryforward amount was the realization of TOSI in the earlier year.
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 11, 2024-1005801C6 under s. 120.2(1).
G E Financial Investments – English Court of Appeal finds that a deemed US resident was not a US treaty resident
A US company (“GEFI Inc.”) and UK company (“GEFI”) in the GE group formed a Delaware LP (“LP”) with GEFI Inc. as the 1% general partner and GEFI as the 99% limited partner. LP acquired five intercompany loans.
The stock of GEFI Inc. and GEFI were stapled, which caused GEFI to be deemed to be resident in the US under the Code, with a view to increasing the US foreign tax credit capacity in the US. GEFI claimed credit for the US income taxes payable by it against its UK income tax liabilities.
HMRC denied the credit. The first issue was whether GEFI was a US resident for purposes of Art. 4 of the UK-US treaty, which relevantly referred to “any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.” In concluding that GEFI was not so resident, Falk LJ stated:
The US connections required by s.269B are limited to a) stapling of more than 50% by value of the foreign corporation's shares to those of a domestic corporation, and b) direct or indirect ownership as to 50% or more by US persons. … Neither [branch] requires any form of link between the company itself and the United States, whether a formal legal one (such as incorporation, the location of its registered office or similar) or a factual one (such as place of management). … In contrast, the criteria specified in Article 4(1) all describe legal or factual connections between the entity itself and the relevant Contracting State of a kind that may justify worldwide taxation.
This then left the issue as to whether the US taxes imposed on GEFI were imposable in accordance with the Treaty on the basis of GEFI, through its participation in LP, having a permanent establishment in the US - so that the UK was required to accord a foreign tax credit to GEFI in accordance with Art. 24 of the Treaty (similar to Art. 24 of the Canada-UK Treaty). In confirming the finding of the FTT that the LP did not have a permanent establishment in the US on the basis that it was not carrying on business there under the UK concept of a business (having regard to Art. 3(2)), Falk LJ stated:
In essence, the LP acted merely as a passive holding vehicle for some loan receivables.
Neal Armstrong. Summaries of Commissioners for His Majesty's Revenue and Customs v GE Financial Investments [2024] EWCA Civ 797 under Treaties – Income Tax Conventions – Art. 4, Art. 5.
Income Tax Severed Letters 17 July 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Black – Tax Court of Canada finds that s. 7(2) did not apply to a trust holding employer shares for employees where none of the shares were specifically allocated to specific employees
A year before a sale of 61% of a private Canadian video gaming company for Cdn.$73 million, an estate freeze was implemented by its dominant individual shareholder, and a 15% common shareholding was issued for nominal consideration to a trust for the benefit of present and future employees. Employees were issued units in the trust (which, in aggregate, came to equal the number of common shares held by it) from time to time as determined by the compensation committee, and with any distributions of trust income to be made pro rata to their respective unitholdings. On the sale of 61% of the trust’s shares, it distributed the sales proceeds to its unitholders pro rata to their unitholdings.
Spiro J found that Chrysler No. 1 had found that, in the context of a mooted s. 7(2) trust:
the subsection 7(1) requirement for an agreement to “issue” a particular number of shares to a particular employee included an agreement to “allocate” a particular number of shares to a particular employee where a trust held the shares for the employee.
He further found:
[A]n agreement to issue shares within the meaning of subsection 7(1) does not arise when the corporation commits itself to allocating a certain number of shares in the aggregate to all eligible employees by way of a trust. That is exactly what happened here. By committing itself to issuing 1,380,000 shares to a trust for the benefit of all eligible employees, the Company failed to meet the requirements of subsections 7(1) and 7(2) … .
As ss. 7(1) and (2) did not apply, and the trust was acknowledged to be an employee benefit plan, the distributions to the unitholders were fully taxable to them under s. 6(1)(g) and did not benefit from more favourable treatment under s. 104(21) or 110.6(2.1).
Neal Armstrong. Summary of Black v. The King, 2024 TCC 96 under s. 7(2).
Neal H. Armstrong editor and contributor