News of Note
G E Financial Investments – English Court of Appeal finds that a deemed US resident was not a US treaty resident
Email this ContentA 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).
CRA indicates that a conversion of shares received on marriage breakdown causes the TOSI exclusion for such shares to cease applying
Consequent on the breakdown of their marriage and separation, A, who held 80% of the shares of Opco, transferred a 20% shareholding to B such that para. (b) of the “excluded amount” definition in s. 120.4(1) now was satisfied. Although B was now deemed to not be related to A by virtue of s. 120.4(1.1)(e), the children of A and B, who held 20% of the Opco shares, continued to be “source individuals” in respect of B. Subsequent to such common share transfer, B’s common shares are converted on an Opco reorganization into Opco preference shares.
After noting that para. (b) referred only to property acquired by the individual (B) under a (marriage breakdown) transfer described in s. 160(4) and failed to refer to property substituted therefor, CRA indicated that since the preference shares were substituted property, the para. (b) exclusion ceased to apply when the common shares were converted to preference shares, so that B would be subject to TOSI on amounts derived from the preference shares if no other exclusion applied.
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 10, 2024-1005811C6 under s. 120.4(1) – excluded amount – (b).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in October of 2001. Their descriptors and links appear below.
These are additions to our set of 2,892 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 | 24 April 2001 Internal T.I. 2000-0037677 F - DEBENTURES CONVERTIBLES
2000-0046367 F has virtually identical taxpayer submissions and CRA comments. See also 2001-0081837 F.
|
Income Tax Act - Section 143.3 - Subsection 143.3(3) - Paragraph 143.3(3)(a) - Subparagraph 143.3(3)(a)(ii) | under pre-s. 143.3 Act, where shares issued for property, the shares’ stated capital determines the property’s cost, whereas the cost of the shares to the shareholder is their FMV |
| 26 April 2001 Internal T.I. 2000-0046367 F - DEBENTURES CONVERTIBLES
See also 2001-0081837 F.
|
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(f) | shares issued on conversion of debenture for their stated capital (equal to debenture face amount) rather than higher FMV, so that they were not repaid at a premium | |
| Income Tax Act - Section 54 - Adjusted Cost Base | where shares issued for property, the shares’ stated capital determines the property’s cost, whereas the cost of the shares to the shareholder is their FMV | ||
| Income Tax Act - Section 89 - Subsection 89(1) - Paid-Up Capital | stated capital of shares issued determined in board’s discretion and may be less than their FMV | ||
| 29 March 2001 Internal T.I. 2000-0059117 F - PROVISION POUR GARANTIES | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(l.1) | partnership is not eligible for the s. 20(1)(l.1) reserve/ providing guarantees is not providing insurance | |
| 1 June 2001 Internal T.I. 2001-0067047 F - DOMMAGES DISCRIMINATION | Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance | damages for loss of income from employment due to discrimination were not a retiring allowance or otherwise taxable | |
| 23 October 2001 External T.I. 2001-0092025 F - Fonds commun de placement à risques | Income Tax Act - Section 96 | French Fonds Commun de Placement à Risques was likely a co-ownership arrangement | |
| 23 October 2001 External T.I. 2001-0096525 F - transfer and loans to corp-attribution rules | Income Tax Act - Section 74.4 - Subsection 74.4(2) | spouse was a specified shareholder where she was one of the beneficiaries of a discretionary trust holding more than 10% of the corporation’s shares |
Barwicz – Tax Court of Canada finds that a distribution by a discretionary trust in satisfaction of a capital interest occurred for no consideration for s. 160 purposes
The taxpayer was one of nine beneficiaries of a discretionary inter vivos personal trust which ceased to be resident in Canada on December 17, 2001 as a result of the replacement of its sole trustee by a Barbados corporate trustee. The taxpayer noted that an inter vivos by virtue of s. 249(1) generally had a calendar taxation year and argued that “year” in s. 94(1)(c)(i) referred to the 2001 calendar year, so that, by virtue of becoming a deemed resident trust under s. 94(1) on December 17. 2001, the taxpayer was deemed to have been resident in Canada for Part I purposes from the time of its formation in 2001 (i.e., both before and after the emigration time) – hence, s. 128.1(4) had no application and the trust avoided capital gains tax on shares held by it with an accrued gain. (This argument would have been more difficult under current s. 94(3)(a), which refers to the trust’s “particular taxation year.”)
In rejecting this submission and in finding that the trust realized gain on the shares pursuant to s. 128.1(4)(b), Gagnon J noted that the two provisions could be readily read as giving priority in this regard to s. 128.1(4), and that he could not see “any indication that Parliament's objective was to allow trusts such as the Trust to leave Canada without incurring the special emigration tax triggered by subsection 128.1(4).”
The trust subsequently made two substantial capital distributions to the taxpayer (the second of which effectively terminated the trust). Gagnon J confirmed the Crown’s position that the taxpayer had not given consideration to the trust for either distribution (e.g., in exchange for part or full satisfaction of his capital interest in the trust) so that he was liable under s. 160(1) for the trust’s unpaid departure tax. In this regard, Gagnon J first noted:
[I]f one party is enriched and the other impoverished by the same amount, it will be possible to conclude that the party who became richer did not offer equivalent consideration … .
In finding that that was the situation here, he indicated that:
- “the trustee's distributions had no impact on the rights of a beneficiary of the Trust who had or had not received a distribution;” and
- although the taxpayer “had a right under the Trust to be considered by the trustee for any distribution on the same basis as the other beneficiaries … there is no reason to believe that anyone would have paid even a very small amount for [this right].”
In also rejecting the taxpayer’s submission that the deeming by s. 107(2) of proceeds for the distributed property equal to its cost amount constituted the receipt by the trust of consideration for s. 160(1)(e) purposes, Gagnon J indicated inter alia that:
- the concept of “transfer” in s. 160 should not be muddied by tax deeming provisions,
- that the opposite view implied, for instance, that in the quintessential case of a parent gifting property to a child, s. 160 would not apply because the parent received deemed FMV proceeds under s. 69(1)(b) and,
- in any event, the deemed proceeds arising under s. 107(2) were not deemed to be paid by the beneficiary.
This case suggests that the CRA view -- that a trust, which distributes property to a non-resident in satisfaction of a capital interest in the trust which is taxable Canadian property, will be liable under s. 116(5) absent withholding or obtaining a s. 116 certificate (see, e.g., 2011-0399501E5) – may be incorrect where the trust is a discretionary trust.
Neal Armstrong. Summaries of Barwicz v. The King, 2024 CCI 93 under s. 128.1(4)(b), s. 160(1)(e) and General Concepts – FMV – Other.
CRA confirms that a RRIF may not make a Reg. 8303(6) qualifying transfer to a RPP in connection with a past service event
Reg. 8303(6) contemplates qualifying transfers from, for example, an RRPS or a money purchase provision of a registered pension plan, to a defined benefit provision of a registered pension plan (including an individual pension plan) to fund past service benefits, for example, when additional periods of pensionable service are credited. CRA confirmed that no transfer of property from a RRIF to a defined benefit provision of a registered pension plan can occur pursuant to Reg. 8303(6).
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 8, 2024-1007121C6 under Reg. 8303(6).
CRA rules that using employees to provide on-line health services to non-resident patients from home offices in Canada does not create a PE in Canada
Three corporate taxpayers, which are resident in three countries with which Canada has treaties, use employees residing in those respective countries to provide online (e.g., by phone or video) services to patients in the same time zone. The taxpayers have now started providing the same services to patients in the same time zone as a Canadian province (“western patients”) but will not provide services to any patients located in Canada.
In order to accommodate employees who do not wish to work on night shifts in providing services to western patients, the taxpayers will permit (and financially assist) them to rent short-term accommodation (they will stay no more than 183 days) in such province, so that they can use their home office there to provide the services to western patients using computers provided by their employer. The taxpayers will continue to maintain their servers outside Canada and will have no access rights to such home offices.
CRA ruled that the taxpayers will be considered to be carrying on business in Canada while such employees are providing such services, but that they will not be considered to be carrying on business in Canada through a permanent establishment, as defined in Article 5 or V of the applicable treaty, solely as a consequence of such services being so provided.
Neal Armstrong. Summary of 2024 Ruling 2023-0984281R3 under Treaties – Income Tax Conventions – Art. 5.
Income Tax Severed Letters 10 July 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a PAC cannot be held by a trust not listed in Reg. 304(1)(c)(iii)(A)
A prescribed annuity contract (PAC) generally provides a more beneficial tax treatment to the annuitant than other types of annuities, which are subject to the accrual rules in s. 12.2(1). One of the requirements to be a PAC under Reg. 304(1)(c) is the requirement in Reg. 304(1)(c)(iii)(A) that the “holder” of the annuity contract be an individual (other than a trust) or a listed type of trust, i.e., an alter ego trust, joint spousal or common-law partner trust, post-1971 spousal or common-law partner trust, or qualified disability trust.
CRA rejected a suggestion that a PAC could be held in a non-listed trust in reliance on Reg. 304(3)(a), which deems the annuitant under an annuity contract to be the holder of the contract where the contract is held by another person in trust for the annuitant (defined in Reg. 304(4) as a person who is entitled to receive annuity payments under the contract) – so that (it was suggested) the holding of the mooted PAC by a non-listed trust could be deemed to be its holding by an individual beneficiary of the trust.
CRA indicated that Reg. 304(3)(a) could, for instance, permit a parent to hold an annuity contract for the parent’s child until the attainment of a specific age, so that Reg. 304(3)(a) would deem the child to be the holder of the contract, such that there thus would be an individual holder who satisfied Reg. 304(1)(c)(iii)(A). CRA concluded that “the expression ‘in trust’ in paragraph 304(3)(a) … is more akin to a nominee [arrangement]” and is not meant to accommodate non-listed trusts.
Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 7, 2024-1005821C6 under Reg. 304(1)(c)(iii)(A).