News of Note
Glencore – Federal Court of Australia finds that transfer pricing should take into account the division of functions between the two cross-border parties
Email this ContentAn Australian Glencore subsidiary (“CMPL”) with a high-cost copper mine entered into a three year extension of an agreement for the sale of copper concentrate to Glencore (“GIAG”) with a number of complicated-to-describe features which, nonetheless, were not unusual for the industry, such as deductions for treatment and copper refining charges that were notional rather than based on the actual refining costs and “quotational period optionality with back pricing” (e.g., with elements of backdating that favoured GIAG.) The Commissioner did not think it coincidental that the result was that CMPL generated significantly less profit than if it had sold on less complicated terms, and assessed under the OECD-grounded Australian transfer-pricing rules.
Before concluding that “the taxpayer has established that the prices that CMPL was paid by GIAG for the copper concentrate it supplied to GIAG under the … Agreement were within an arm’s length range” (and before quoting with approval the statement in Cameco that “The traditional transfer pricing rules must not be used to recast the arrangements actually made among the participants,”) Davies J stated:
As made clear in Chevron, the task of ascertaining the consideration that might reasonably be expected would have been paid to CMPL for the copper concentrate that it sold to GIAG is not to be undertaken upon the hypothesis that CMPL was not a member of the Glencore Group. … [T]he relevant mine producer for the purposes of the [arm’s length] hypothetical agreement is a mine producer with all the characteristics of CMPL, which include … that it had no need for a logistics or marketing division because it sold the whole of its production for the life of the mine to a buyer with GIAG’s characteristics, namely a trader with a substantial marketing team which purchased the whole of the mine’s production for the life of the mine.
Neal Armstrong. Summary of Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432 under s. 247(2)(a).
Teitelbaum – Quebec Court of Appeal finds that an RCA balance (viewed as a “right or thing”) was “transferred” on death notwithstanding its subsequent distribution
ITA 70(3) requires “rights or things” of a deceased taxpayer to be recognized in the taxpayer’s terminal return unless the executors elect to include those amounts in a separate return. However, s. 70(3) overrides this rule, and provides that, where the rights or things have been transferred to a beneficiary within one year of the death, the amounts received by the beneficiary on the realization or disposition of the rights or things are to be included in the beneficiary’s income.
The will of the deceased common-law partner of the taxpayer designated her as the beneficiary of all his “pension plans.” Gagnon JCA accepted that this had the effect of bequeathing to her the value of his RCA, with that legacy being paid in two lump sums paid more than one year after the deceased’s death.
The taxpayer argued because she received these two sums more than one year after his death, they were not includible in her income under the Quebec equivalent of s. 70(3)) as a legacy pursuant to this designation. Gagnon JCA stated:
This argument confounds the debt claim bequeathed by the deceased with the liquidation of that same claim by the Trust. The Taxpayer could not be the heir of the deceased other than by what she received on the date of his death. …
In sum, I am of the view that the debt claim bequeathed to the Taxpayer was transferred to her on … the date of death of Mr. Lewin. This is a transaction described by TA section 430. The reference in this provision to the time of the realization of this right bears only on the determination of the year in which the amounts received must be included in the income of the taxpayer.
Thus, although the “transfer” to her occurred on Mr. Lewin’s death, she was not required to include any amount in her income until she received the amounts in her subsequent taxation year (when the amounts were “realized”).
Neal Armstrong. Summary of Agence du revenu du Québec v. Teitelbaum, 2019 QCCA 1408 under s. 70(3).
CRA confirms that negative ACB is not triggered under a parent-child transfer of an interest in a family farm or fishing partnership under s. 73(4.1)(c)
Where a taxpayer has so elected in the taxpayer's return respecting the transfer of an interest in a family farm or fishing partnership to the taxpayer’s resident child, the taxpayer is deemed by s. 73(4.1)(c) not to have disposed of the interest, and the child is deemed to have acquired the interest at the taxpayer’s cost. CRA confirmed that this meant that any negative ACB for the interest was not triggered on its transfer as a capital gain. Furthermore, that negative ACB in effect flowed through to the child under s. 73(4.1)(c)(iii).
Neal Armstrong. Summary of 15 July 2019 External T.I. 2018-0747761E5 F under s. 73(4.1)(c).
CRA settles the Wheaton transfer-pricing dispute by accepting a 30% mark-up on the head office expenses
As noted in the previous post, Wheaton’s appeal of CRA reassessments – which applied s. 247(2) to effectively treat essentially all of the income of Wheaton’s offshore subsidiaries (“Wheaton International”) from precious metal streaming contracts as income of Wheaton – was settled in December 2018. The settlement provided that for all its 2005 and subsequent taxation years (including for the indefinite future, but subject to no changes in law), the only applicable changes to the transfer-pricing practices of Wheaton were that:
- The service fee charged by Wheaton for the services provided to Wheaton International will be adjusted to:
- Include capital-raising costs associated with Wheaton for the purpose of funding streaming transactions entered into by Wheaton International; and
- Increase the mark-up applied to Wheaton’s cost of providing services to Wheaton International, including the above capital-raising costs, from the current 20% to 30%.
Neal Armstrong. Summary of 13 December 2018 Wheaton Precious Metals Press Release under s. 247(2).
Silver Wheaton – Tax Court of Canada denies class action plaintiffs access to documents provided on discovery in transfer pricing dispute
Silver Wheaton (renamed Wheaton Precious Metals) was assessed in 2015 for Cdn.$353M respecting CRA’s position that, pursuant to s. 247(2), Wheaton’s income should be increased by an amount equal to substantially all of the income earned outside Canada under precious metal streaming contracts by its Caymans subsidiaries for the 2005 to 2010 taxation years. This produced an immediate drop in its share price, and a U.S. federal securities class action was immediately brought against it. The representative plaintiffs in that action brought a motion in the Tax Court seeking a declaration that an implied undertaking of confidentiality did not apply to Wheaton’s discovery evidence in the Tax Court action (which subsequently was settled in December 2018). In denying this motion, D’Arcy J stated:
The granting of the Non-parties’ motion would result in the very evil the Supreme Court cautions against: defeating the objective of the implied undertaking of confidentiality, which is to encourage open and generous discovery by assuring the parties being discovered of confidentiality.
Neal Armstrong. Summary of Silver Wheaton Corp. v. The Queen, 2019 TCC 170 under Tax Court Rules, s. 16.1(1).
Cortland is proposing to acquire a US rental portfolio through acquiring the units of Pure Multi-Family REIT LP
It is proposed that an LLC (the “Purchaser”) that is an affiliate of a third party (Cortland) acquire for cash all the (listed) Class A units and (unlisted but convertible) Class B units of Pure Multi-Family REIT LP (“Pure Multi-Family”).. The US rental portfolio of Pure Multi-Family is held through a US private REIT.
The LPA for Pure Multi-Family REIT LP will be amended to provide for a special allocation of income to the unitholders under s. 96(1.01). However, there is no mention of there being any foreign accrual income from the US REIT being allocated for s. 96(1.01) purposes to Pure Multi-Family REIT LP under the stub period accrual rule in s. 91(1.2) (there presumably is none).
Canadian unitholders will not be subject to FIRPTA tax assuming that they comply with the 5%/regularly traded exemption. Closing is conditional on an opinion that the US REIT qualifies as such.
Neal Armstrong. Summary of Pure Multi-Family REIT LP Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions.
CRA suggests that a double penalty should only be assessed where this is appropriate and equitable
A T1135 form was filed late and with missing information, that did not affect the substance of the form. Headquarters found that “technically” both a penalty of $2,500 under s. 162(7) (for late-filing) and of $100 under s. 162(5)(a) for the missing information, could be assessed, but then stated:
We suggest that care be taken to ensure that assessing penalties under subsections 162(5) and (7) is both appropriate based on the relevant facts of a situation and equitable to the tax community as a whole.
Headquarters also noted that for s. 162(7) penalty purposes, “an information return that is missing substantial information will be considered invalid and, therefore, will not be considered to have been filed.”
Neal Armstrong. Summary of 27 June 2019 Internal T.I. 2019-0791541I7 under s. 162(5)(a).
Income Tax Severed Letters 4 September 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Yellow Point – Tax Court of Canada finds that an ecological gift was made in the year before it was certified as such
A taxpayer, who donated an interest in ecologically sensitive land to two qualified donees in 2008, unsuccessfully argued that the gift was not made until 2009 for purposes of computing the five-year (now 10-year) carryforward period described in s. 110.1(1)(d)(iii), because it was not until 2009 that he received certification from the Minister of the Environment as to the lands’ ecologically sensitive nature. Visser, J stated:
[A] gift has been made … when a donor legally effects a voluntary transfer of property to a donee … .
… [T]he certificates are necessary to claim a deduction under paragraph 110.1(1)(d) … but not to determine if a gift of land has been “made” for the purpose of paragraph 110.1(1)(d).
Neal Armstrong. Summary of Yellow Point Lodge Ltd. v. The Queen, 2019 TCC 178 under s. 110.1(1)(d)(iii).
CRA expands its Folio on principal residences
CRA has revised its Folio on the principal residence, for instance:
- Noting its discretion under s. 220(3.21)(a) to extend the time for making a principal residence designation
- Providing a simple example of the application of the transitional rule in s. 40(6.1) to a personal trust that does not come within the narrow category of excluded trusts in (c.1)(iii.1) of the principal residence exemption, i.e., a personal trust whose family beneficiaries occupied the house from the time of the trust’s acquisition of the house must recognize a gain based on the house’s appreciation by $50,000 from December 31, 2016 to the sale of the house in 2017.
Additional Summaries of Folio S1-F3-C2 under s. 220(3.21)(a) and s. 40(6.1).