News of Note
Burton – Full Federal Court of Australia confirms that a foreign tax credit was reduced by ½ when only ½ of a capital gain was brought into taxable income
Email this ContentAn Australian-resident individual was taxed at the 15% long-term U.S. capital gains rate on his gains on the disposal of U.S. oil and gas drilling rights. For Australian purposes a 50% discount was applied to the capital gain before imposing tax at a rate of around 45% on it. The Australian foreign tax credit (FITO) provision provided a credit for foreign income tax “if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.” The Commissioner successfully took the position that as only half of the U.S. gain had been included in the individual’s income, he was entitled to the FITO for only half of the U.S. tax.
Art. 22(2) of the Australia-U.S. Convention provided that U.S. tax “shall be allowed as a credit against Australian tax payable in respect of the income” but went on to provide that: “Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time.” Art. 22(2) did not help. The Full Court accepted that “income” could refer to the full (100%) gain. The problem was in the last quoted sentence, which referenced Australian tax law. Jackson J stated:
The term that is used to indicate a connection between the relevant amount of income, whatever that may be, and each of the United States tax and the Australian tax is 'in respect of'. That is indeterminate. No doubt, in each case the connection cannot be a distant, arbitrary or illogical one. But to the extent that it is necessary to identify the connection more precisely, that must be done in accordance with the provisions of the law of Australia. That is what the [quoted] sentence of Art 22(2) requires.
In considering the present case, it does not stretch the language of the article to read 'Australian tax payable in respect of the income' as referring to capital gains tax payable in Australia on assessable income being an amount equal to only 50% of the gain.
The CRA approach is to allow the U.S. tax on 100% of the gain to be taken into account in computing the Canadian foreign tax credit on the Canadian taxable capital gain (see. e.g., Folio S5-F2-C1, para. 1.89).
Neal Armstrong. Summaries of Burton v Commissioner of Taxation, [2019] FCAFC 141 under s. 126(1) and Treaties – Income Tax Conventions – Art. 24.
CRA indicates that only one of two related joint employers should T4 an employee for the s. 6(1)(e) or (k) benefit provided to him
CRA indicated that where an individual had two employers, which were related corporations, and one of the two corporations acquired a car that it made available to Mr. X, which he was free to use for personal purposes but was also required to use in his work for both employers, that:
- A single benefit under each of ss. 6(1)(e) and 6(2), and under s. 6(1)(k), was to be computed.
- Each such single benefit was to be reported in a T4 slip issued by either employer (as they agreed) rather than being split between the T4 slips issued by both corporations.
Neal Armstrong. Summaries of 17 July 2019 External T.I. 2018-0777951E5 F under s. 6(2) and Reg. 200(3).
CRA concludes that a loss that was suspended under s. 40(3.5)(c)(i), can be de-suspended by winding-up the CFA referenced under s. 40(3.5)(c)(i)
Canco realized a suspended loss when it contributed its shares of a controlled foreign affiliate (CCo) to another CFA (BCo), and then took the position that such loss was de-suspended when CCo was then liquidated under s. 95(2)(e) into BCo. In 2017-0735771I7, Headquarters rejected this position on the basis that, for purposes of s. 40(3.5)(c)(i), Bco was a corporation “formed” on the “merger” of CCo with BCo – with the result that BCo was deemed to continue to own the shares of CCo with which it was affiliated, notwithstanding that CCo had, in fact, ceased to exist.
Headquarters was subsequently asked to consider the consequences of Canco dropping its shares of Bco under s. 85.1(3) into another Canco CFA (DCo) followed by the wind-up of BCo into DCo. Headquarters concluded that this resulted in the loss being de-suspended, stating:
Upon the completion of the liquidation of BCo, it would no longer be affiliated with ACo.
… Pursuant to subparagraph 40(3.4)(b)(i), the Suspended Loss will be deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.
Neal Armstrong. Summary of 30 April 2019 Internal T.I. 2019-0793481I7 under s. 40(3.4)(b)(i).
CRA rules that Reg. 5907(2)(f) does not apply where inventory is transferred on a foreign rollover basis
In order to wind-up CFA2 into CFA1 (which is directly held by Canco), CFA2 will first distribute its retained earnings and then sell its assets at their book value (i.e., for less than their FMV) in exchange for a promissory note of CFA1 and the assumption of liabilities, with that note then being extinguished as a result of its assignment to CFA1 on the formal liquidation of CFA2. The asset transfers by CFA2 to CFA1 will occur on a rollover basis under the foreign tax law.
CRA ruled that no amount of revenue, income or profit will be added to the earnings of CFA2, pursuant to Reg. 5907(2)(f) respecting CFA2’s transfer of non-capital assets to CFA1. In its summary, CRA stated:
Since the transfer of the non-capital assets is done on a rollover basis under the relevant foreign income tax law, the conditions of paragraph 5907(2)(f) are not met.
More routinely, CRA ruled that Reg. 5907(5.1) will apply to the disposition by CFA2 of its capital property to CFA1 on these transactions.
S. 15(1) will not apply notwithstanding that CFA2 sold its assets to its shareholder at book value rather than their higher FMV.
Neal Armstrong. Summary of 2019 Ruling 2018-0762581R3 under Reg. 5907(2)(f) and s. 15(1).
CRA indicates that rent for fully-furnished apartments is all rent
CRA indicated that all of the rent generated from a rental unit that was fully-furnished with “furnishings typically … found in a residence” would qualify as “rent from real or immovable properties” for these purposes, assuming that there was a single charge that did not allocate anything to the furnishings. Although not relevant in this case because it was a subsidiary LP that rented the units, this general approach also would be helpful to the interpretation of s. 132(6), which permits a real estate rental undertaking, but not an undertaking of renting tangible personal property.
Neal Armstrong. Summary of 29 July 2019 External T.I. 2018-0784701E5 under s. 122.1(1) - “rent from real or immovable properties.”
Income Tax Severed Letters 21 August 2019
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA gives an expansive interpretation to the GST/HST definition of “debt security”
CRA gave the following rationale for an NSF cheque charge being for an exempt financial service:
[A] dishonoured cheque triggers a situation in which the [Organization] obtains a “right to be paid money” by the drawer of the cheque. This “right to be paid” meets the definition of “debt security” in subsection 123(1). The debt security is a “financial instrument” and the processing of a financial instrument is an exempt supply of a “financial service” … .
Neal Armstrong. Summaries of 23 April 2019 GST/HST Ruling 186334 – S under ETA Sched V, Pt VI, s. 20, s. 20(c), s. 20(b)(i), Sched. V, Pt III, s. 6 and ETA s. 123(1) – debt security.
Brandimarte – Federal Court reviews CRA decision to partly waive interest that accrued over 35 years, and rejects comparison to those with complete interest relief
Taxpayers who were the innocent (albeit, perhaps aggressive) victims of a tax fraud, i.e., purported partnerships giving rise to large reported losses in the mid-1980s where, in fact, the partnerships were non-existent, ultimately had their Tax Court actions decided against them in 2014, and sought relief in 2014, or 10 years previously, for accrued interest. A large part of the delay (including CRA not assessing the taxpayers’ returns for quite some time) was attributable to CRA and Justice wanting to bring a criminal prosecution against the promoters before dealing with the taxpayers.
After three levels of review of the requested interest relief, CRA cancelled approximately 15 years and 63 months of accrued interest for the 2004 and 2014 applications, respectively. Boswell J found this decision to be reasonable. The lower relief for the 2014 application properly reflected the application to those applicants of the prohibition after a 2005 amendment to going back more than 10 years with interest relief; and the CRA delays were appropriately weighed against the fact that the applicants had had the ability to have their returns assessed so that they could pay the tax and cut off the interest.
Respecting the taxpayers’ comparison of themselves as the “innocent victims of fraud”, with the “KPMG Untouchables.” who “knowingly participated in a suspect offshore tax scheme,” and “the GLGI cases where taxpayers were granted full interest relief despite their culpability in participating in the tax schemes,” Boswell J stated (at para. 59):
…[C]omparisons to the KPMG Untouchables or the GLGI donors are neither factually relevant nor legally permissible. In Ludco … the Federal Court of Appeal held that evidence about other taxpayers who had benefited from an interest deduction for loans obtained in circumstances identical to those of the appellants was inadmissible… .
Neal Armstrong. Summary of Brandimarte v. Canada, 2019 FC 1034 under s. 220(3.1).
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week, and a further 5 translations of CRA interpretations released in November, 2011 (all of them, from the October 2011 APFF Roundtables). Their descriptors and links appear below.
These are additions to our set of 939 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 3/4 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
North American – Manitoba Court of Queen’s Bench comments briefly on s. 256(5.11)
Dewar J reversed a finding of the Manitoba Tax Appeals Commission that a corporation (“533”) was subject to de facto control (as described in ITA s. 256(5.1)) by Mr. Carson rather than Mrs. Carson, Accordingly, 533 in fact was not associated within the meaning of ITA s. 256 with Mr. Carson’s companies and, thus, also, for Manitoba payroll tax purposes. This reversal was made on the basis that the TAC had misinterpreted the terms of a declaration of trust respecting 2/3 of the 533 shares held by one of Mr. Carson’s companies. With that reversal, there were no other significant findings that would support the TAC’s findings of association. In contrast to McGillivray, the evidence indicated that “she was making the material decisions in the operation of the restaurant” of 533, and there was no unwritten agreement that she would follow her husband’s direction.
Dewar J also commented obiter on the subsequent enactment of s. 256(5.11), stating:
I make no comment about whether that amendment if applicable in 2007 - 2011 would have changed the result which I have come to on this appeal, except to say that it would have merited further consideration. The amendment permits a court to conclude that a person without a legally enforceable right or ability to control or influence the election of directors has control of a company for the purpose of determining whether that company is associated with another.
I have italicized one word to highlight the lukewarm nature of this comment.
Neal Armstrong. Summary of North American et al. v. The Deputy Minister of Finance, 2019 MBQB 29 under s. 256(5.1).