News of Note
CRA considers shares of Targetco now held 100% by Acquisitionco, and with a formal delisting imminent, to still be listed
Email this ContentThere is a problem in the wording of the definition of a public corporation. Even if a heretofore public corporation has made a good election under (c)(i) of that definition to cease to be a public corporation, it will continue to be a public corporation under para. (a) of the definition at that time if its shares are still listed. Accordingly, the Joint Committee has submitted that para. (a) should be amended by adding a proviso that the corporation nonetheless will not be considered to be a public corporation under para. (a) if it ceased to be a public corporation under para. (c) because of a valid election or designation.
The background is this. 2017-0723771C6 indicated that where Acquisitionco acquired all the shares of Targetco, a public corporation, and immediately amalgamated with it, Amalco could potentially make an election on behalf of Targetco under (c)(i) of the public corporation definition for Targetco not to be a public corporation so that Amalco was not deemed to be a public corporation under s. 87(2)(ii). This response was problematic because this election could not be made by Amalco until the Targetco shares were delisted, which might take several days to occur, and because CRA needed to accept that the fact that the Targetco shares no longer existed did not preclude the making of this election (as to which it was prepared to rule on a case-by-case basis rather than giving any blanket assurances).
CRA recently declined to give a Technical Interpretation that if, shortly before the amalgamation of Targetco with Acquisitionco, Acquisitionco held all the Targetco shares and the Stock Exchange had been notified to delist the shares, the Targetco shares would not be considered to be listed for purposes of paragraph (a) of the definition of public corporation.
Neal Armstrong. Summary of 4 March 2019 Joint Committee Submission on Definition of “Public Corporation” under s. 89(1) - public corporation – para. (a).
FTQ – Federal Court of Appeal affirms that a payment in substance made to walk away from a worthless investment did not qualify under s. 18(1)(a)
The taxpayer agreed with the City of Chandler that it would no longer use any loan repayment proceeds received by it from a City-owned corporation - that had failed in an costly attempt to restart a paper mill close to the City – to invest in a prospective replacement economic-development LP to be sponsored by the City, but would instead make a “gift” of the loan repayment proceeds (which ended up totalling $9.3 million) to the City, for which it received charitable receipts. Ouimet J found that there was no “gift” in the context of the taxpayer being relieved of its obligation to invest in an enterprise of questionable worth.
He also rejected the taxpayer’s alternative argument that the payments qualified for current deduction consistently with the s. 18(1)(a) income-producing purpose test given that their purpose instead was to avoid involvement in the proposed LP and to leave to the City alone the responsibility of using the sums to economically develop the region.
The case was appealed on the second ground and has now been briefly affirmed by the Federal Court of Appeal.
Summaries of Fonds de solidarité des travailleurs du Québec (F.T.Q) v. The Queen, 2018 CCI 3, aff'd on s. 18(1)(a) grounds 2019 CAF 36 under s. 110.1(1)(a) and s. 18(1)(a) – income-producing purpose.
Income Tax Severed Letters 6 March 2019
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The response to the new U.S. anti-hybrid Regs. may not generate much revenue to the IRS
Code s. 267A and the regulations thereunder target deduction/non-inclusion situations. All of the common structures used by Canadian (and other non-U.S.) multinationals with U.S. operations have been adversely affected. What come to mind are cross-border repo financing structures, tower structures, Lux Fincos with MRPS, and branch mismatch structures.
Some taxpayers are exploring clever technical changes to their existing hybrid structures, notwithstanding that this approach may bump up against the PPT antiavoidance rule in the proposed Regulations. Others may throw in the towel.
[O]ther MNEs based in Canada (and elsewhere) might opt for a third approach that relies on simpler, non-hybrid, third-country financing structures. Some countries that have tax treaties with the United States — for example, Bulgaria, Hungary, Ireland, and Switzerland — have been carefully preparing for a post-BEPS world and offer very competitive corporate tax rates around 10 percent that may bring in business. Trading a 21 percent rate for a 10 percent rate is likely to be an attractive option for many tax managers.
Neal Armstrong. Summaries of Nathan Boidman and Michael N. Kandev, “Expected Adverse Effects of Proposed U.S. Anti-Hybrid Regulations on Inbound Financing by Canadian MNEs,” Tax Notes International, February 11, 2019, p. 623 under s. 95(2)(a)(ii)(B)(II) and s. 113(1)(a).
CRA ruling letter indicates that an intercompany subordinated loan will bear interest at the rate for a senior secured financing
CRA provided the usual rulings (including on s. 55(2)) respecting a transaction for the transfer of non-capital losses from Profitco to its Lossco parent by means of Lossco lending at interest to Profitco, Profitco subscribing for pref of a newly-incorporated sister corp (Newco) and Newco lending without interest to Lossco.
Notwithstanding that the loan made to Profitco was subordinated, the ruling letter states that the interest rate is “based on a comparison to the most recent arm’s length senior secured financing issued” by Lossco. It is unclear whether this was volunteered or volun-told.
The only financial capacity reps given are that Profitco has the financial capacity to pay the interest on the loan to it from its own cash flow and that Lossco has cash of a specified level and will fund annual contributions of capital to Newco (to fund dividend payments on the Newco pref) out of an independent source of income.
Neal Armstrong. Summary of 2018 Ruling 2018-0742641R3 under s. 111(1)(a).
Zdzieblowska – Tax Court of Canada finds that CRA is required to grant an unclaimed and available new rental housing rebate when assessing to deny a new home rebate
ETA s. 296(2.1), generally requires CRA to take unclaimed rebates into account when assessing a taxpayer.
D’Arcy J dealt with a situation where a new home purchaser had claimed a new home rebate on the purchase, whereas in fact a new rental home rebate should instead have been claimed. He found that s. 296(2.1) is applicable where such an individual is assessed to deny a new home rebate. CRA in assessing must take into account any unclaimed new rental housing rebate that was available, as was the case here. However, CRA failed to do so, and the individual failed to file a notice of objection. The individual instead made a late filing for the new rental housing rebate, which was the incorrect thing to do as the two year deadline for making such a filing was inflexible (whereas there is no time limitation for requiring CRA to take that rebate into account at the time it assesses the individual to deny a new home rebate.)
Thus, the individual had no recourse for the mistake of CRA in not applying s. 296(2.1) when it assessed her.
Neal Armstrong. Summary of Zdzieblowska v. The Queen, 2019 TCC 40 under s. 296(2.1).
6 further full-text translations of CRA interpretations are available
We have published a further 6 translations of interpretations released in June 2012. Their descriptors and links appear below.
These are additions to our set of 795 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for March.
CRA indicates that auditors should communicate their reasons for requiring information from taxpayers
Comments of Ted Gallivan included:
Q.3 CRA’s annual audit yield has grown from $8.8 to $13.8 billion gross, with the use of around 5% more in CRA resources. Having said that, the goal is to increase compliance rather than to increase audit yields (Q.10).
Q.5 and 6. CRA is evaluating whether the focus of risk assessment should be done on a transaction-by-transaction, taxpayer-by-taxpayer or return-by-return basis. If CRA sees a big risk indicator, it should tell the taxpayer at that point, rather than waiting for an audit, when decisions have already been made and positions solidified. More generally, CRA is considering getting information to taxpayers even before they file their returns (Q.2).
Q.7 CRA decided not to appeal the BP decision to the Supreme Court because it would effectively have been asking for absolute authority. Headquarters then clarified to field auditors that there must be a valid business reason for seeking information, and that that reason should be communicated to the taxpayer.
Q.9 Although the Panama papers and other leaks did not necessarily relate to the most aggressive types of tax avoidance, it was necessary for CRA to respond to show its resolve. The fact that the 30 exchanging jurisdictions all gave the list a priority resulted in improved information-exchange functioning.
Q.10 There will be a trend towards better coordination within different branches of CRA, such as between the rulings and audit functions (or possibly involving Appeals) and more involvement from Justice, before a decision is made to assess taxpayers.
Neal Armstrong. Ted Gallivan at the 27 February 2019 CTF Corporate Management Tax Conference, including summary of Q.7 under s. 231.1(1).
Finucane – UK Supreme Court finds that the government was required to demonstrate that it resiled from an undertaking based on genuine policy grounds
It is unclear to what extent CRA is legally bound to honour rulings given by it.
The applicant’s husband, a solicitor, was murdered in their home, in the presence of her and their children, by Irish loyalist terrorists with the assistance of collusion from members of the government security forces. Respecting her claim that the government should be held to its promise to hold an inquiry, Lord Kerr stated:
[W]here a clear and unambiguous undertaking has been made, the authority giving the undertaking will not be allowed to depart from it unless it is shown that it is fair to do so. The court is the arbiter of fairness in this context. And a matter sounding on the question of fairness is whether the alteration in policy frustrates any reliance which the person or group has placed on it. …
However, in finding that the government could now resile from its undertaking, he stated:
Where political issues overtake a promise or undertaking given by government, and where contemporary considerations impel a different course, provided a bona fide decision is taken on genuine policy grounds not to adhere to the original undertaking, it will be difficult for a person who holds a legitimate expectation to enforce compliance with it.
Neal Armstrong. Summary of Finucane, Re Application for Judicial Review (Northern Ireland) [2019] UKSC 7 under s. 152(1).
Keurig Canada – Court of Quebec finds that the ARQ did not need the equivalent of ITA s. 152(9) to amend its pleadings with an additional reason for failure of a Quebec bump
The taxpayer was assessed under the Quebec general anti-avoidance rule respecting its engaging in “Quebec bump” transactions, which used Class 12 property (namely, a coffee roaster) purchased from a supplier for $820 thousand to generate a non-capital loss of $541 MILLION. After the taxpayer had launched its appeal, counsel for the ARQ realized through a review of documents previously provided that the roaster likely did not qualify as Class 12 depreciable property, and sought to amend the ARQ’s pleadings to allege this as an additional ground for dismissing the appeal.
After noting that the Quebec Taxation Act did not contain a provision equivalent to ITA s. 152(9) (permitting the raising of additional arguments by the government), Lavigne J nonetheless granted the requested amendment, noting that the source of the ARQ’s error was the taxpayer’s returns, which stated falsely (it was alleged) that the roaster was a Class 12 property. She stated:
It was not for the ARQ to find the error. The burden was on the taxpayer to submit accurate tax returns. …
It would be contrary to the interests of justice for the ARQ to be precluded from a defence based on the facts, which were erroneously presented by the plaintiff, even though the file is at the stage of an appeal from the notice of assessment.
Neal Armstrong. Summary of Keurig Canada Inc. v. Agence du revenu du Québec, 2019 QCCQ 451 under ITA s. 152(9).