News of Note
CRA considers that a dividend distributed by a trust to a connected corporation can be subject to Part IV tax due to the delayed implied effective date of s. 104(19) designations
Email this ContentA dividend is received by a family trust from a Canadian-controlled private corporation with only operating assets (Opco) and immediately distributed to a corporate beneficiary (Holdco) that is connected at that time with Opco - but ceases to be connected by the end of that calendar year due to an in intervening sale of Opco by the trust. CRA considers that the trust will not enjoy the connected-corporation exemption from Part IV tax even if a timely s. 104(19) designation is made by the trust. The reason is that it considers the s. 104(19) designation to not be effective until the end of the year, at which time Holdco no longer is connected.
This is a potential trap on CCPC sales.
Neal Armstrong. Summary of 3 June 2016 T.I. 2016-0647621E5 Tr under s. 104(19).
Vessels or mobile drilling rigs might be “fixed” places of business if they move around within the same oil field
The starting point for considering whether a vessel or other piece of oil and gas equipment is a permanent establishment is to ask whether it is a fixed place of business through which the enterprise’s business is carried on. If a vessel or mobile drilling rig operates in an area that is considered to be geographically and commercially coherent, it may be considered to satisfy the “fixed place” aspect of this test. This could be the case for platform supply vehicles plying the same route repeatedly, or construction support vehicles working on only one subsea installation in the same oil field. It has been suggested this issue should be approached by considering each oil field to be one geographical area, so that a floating platform or rig moving around in the same oil field would, therefore, satisfy the geographically fixed criterion, though it is not fixed to the ground.
Whether a lessor carries on its business through the piece of equipment turns in part whether it is providing crew or other significant services - so that this question might turn on whether the lease is a time charter or bareboat charter.
Furthermore, “if a vessel is contracted to support the installation or removal of pipelines, subsea constructions or drilling rigs, this could be covered by the construction and installation provision in article 5(3) of the OECD Model.”
Neal Armstrong. Summary of Maja Stubbe Gelineck, "Permanent Establishments and the Offshore Oil and Gas Industry – Part 1," Bulletin for International Taxation, April 2016, p. 208 under Treaties – Art. 5.
CRA rules that two properties to be used in an expanded farming business will be replacement property for a single former property
CRA has ruled that where the expropriation proceeds of a farm will be used to purchase two nearby farms (with the scale of the farming business also to be expanded), the two new farms would qualify as replacement properties for s. 44 purposes. This acceptance (consistent with IT-259R4, para. 28) that there can be more than one replacement property, and of some forms of business expansion, are not new.
Neal Armstrong. Summary of 2016 Ruling 2016-0632001R3 under s. 44(5).
ENMAX Energy – Alberta Court of Queen’s Bench finds that an 11.5% interest rate on unsecured intercompany debt was reasonable under s. 20(1)(c) notwithstanding that this exceeded an arm’s length rate of around 8.5%
An Alberta utility (EEC) was required to make payments to the province equal to the provincial and federal income tax to which it would have been subject had it not been tax-exempt. In order to minimize this pseudo-tax liability of EEC, EEC's parent capitalized it mostly with a subordinated note bearing interest at 11.5%, whereas the Alberta government denied the interest deduction over 5.42% as being in excess of the “reasonable amount” referenced in s. 20(1)(c).
After listening to a slew of expert evidence on credit ratings and capital markets, Poelman J concluded that an arm’s length interest rate likely would have been in the range of 7.97% to 8.77% - so that you might have expected him to deny interest expense in excess of 8.77%.
Instead he applied a Gabco-derived test as to “whether no business would have contracted to pay that amount, having only its business considerations in mind and under the form of transaction pursuant to which the obligation was incurred,” and concluded that the interest was fully deductible. He also stated:
[I]ntercompany debt is not rated… . Further… the intercompany notes [here] were burdened with a number of conditions, such as the level of debt and stripping of cash flow to the parent, which would have made them very difficult to sell on the market without significant changes. These observations reinforce the weakness of putting too much emphasis on artificially constructed arm’s length comparators… .
Neal Armstrong. Summaries of ENMAX Energy Corp. v. Alberta, 2016 ABQB 334 under s. 20(1)(c) and s. 67.
CRA substantially rewrites its Bulletin on “Fringe Benefits”
CRA’s new Folio on Benefits and Allowances Received from Employment replaces IT-470R entitled “Employees’ Fringe Benefits” (a phrase which CRA no longer uses). Although there are extensive and substantial changes as compared to IT-470R, this Folio nonetheless does not represent much new. Although the Folio also states that it replaces Income Tax Technical News No. 40, most of the policies in ITTN No. 40 are continued. In addition, various topics which were dealt with in ITTN No. 40 or IT-470R are not brought forward to the Folio and are instead dealt with in referenced web pages on the CRA site. The emphasis in the Folio has shifted somewhat to statements of broader principle, often as enunciated in decisions of the Federal Court of Appeal, including:
- Benefit recognition generally requires generally requires receipt of an economic advantage measurable in monetary terms of which the employee is the primary beneficiary (Lowe)
- “something…provided to an employee primarily for the benefit of the employer…will not be a taxable benefit if any personal enjoyment is merely incidental to the business purpose” (McGoldrick)
- the value of a benefit is its fair market value (Spence)
However, CRA is silent on its judicial authority for a restrictive statement of when a shareholder may receive a benefit qua employee.
Neal Armstrong. Summaries of S2-F3-C2, Benefits and Allowances Received from Employment under s. 6(1)(a), s. 6(1)(a)(iv), s. 6(1)(a)(vi), s. 6(1)(b) and s. 6(1)(b)(v).
Baker – Tax Court of Canada notes that CRA assessed under s. 160 so as to give credit for Quebec tax paid under the Quebec equivalent
On the intestacy of her deceased brother, the taxpayer received property whose value was less than tax debts owing by him to CRA as well as to the ARQ. Smith J adverted to the fact that, technically, the taxpayer could have been assessed by each of CRA and the ARQ under s. 160 and its Quebec equivalent so that, depending on the numbers, she could have been assessed for taxes equalling double the value of the property devised to her. However, such double taxation did not arise here, as CRA only assessed for the difference between the value of her brother’s property received by her and the amount she paid to the ARQ.
Neal Armstrong. Summary of Baker v. The Queen, 2016 TCC 120 under s. 160(1).
Income Tax Severed Letters 13 July 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Deluca – Ontario Superior Court finds that CRA has no duty to protect taxpayers from participating in tax shelters
The taxpayer’s claim against CRA for negligence in failing to revoke the registration of a charity on a timely-enough basis (so that he suffered losses as a result of making supposedly valuable donations to the charity) was struck by Dunphy J in its entirety. Among other grounds, he stated:
The ITA cannot be construed to impose a duty on the Minister or his or her officials to administer the registration and supervision of registered charities in order to protect taxpayers from the risk of dealing with them…
Tax shelters are an instance where the private good competes directly with the public good. … [T]he risk of such deductions being disallowed ought most efficiently to rest with those seeking to benefit from the scheme rather than with taxpayers at large. …
Neal Armstrong. Summaries of Deluca v Canada, 2016 ONSC 3865 under s. 171(1), General Concepts – Negligence, Charter s. 15.
LLLPs may be partnerships on the basis of being governed by a contract for carrying on business in common
At 2016 IFA Roundtable, Q. 1, CRA orally indicated that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes, given their separate legal personality and that all the members (even the GP) have limited liability.
Joel Nitikman suggests that an LLLP or an LLP is a partnership for ITA purposes given that has the following hallmarks of partnership:
(a) it has at least two members;
(b) its members are carrying on business with a view to profit; and
(c) there is in force a contractual agreement, express or implied, in writing orally, or by conduct, between or among its members to carry on the business with a view to profit.
Adoption by CRA of this view presumably would entail repudiation of its position that Quebec limited partnerships which do not carry on business can be partnerships (see 2011-0411911C6, see also Folio S4-F16-C1, para. 1.18). (See also Matias Milet respecting the more flexible Wittgenstein approach of identifying "family resemblances" within a class of entities.)
Neal Armstrong. Summary of Joel Nitikman, "Is an LLP a Corporation for Canadian Tax Purposes? A Reply to the CRA," Tax Topics, (Wolters Kluwer), No. 2313, July 7, 2016, p.1 under s. 96.
CCPCs can choose to forego the small business deduction so as to maximize their GRIP
CRA accepts that a corporation may choose not to take the small business deduction so as to increase its general rate income pool account, thereby increasing the amount that may be distributed as eligible dividends.
Neal Armstrong. Summary of 20 June 2016 T.I. 2016-0648481E5 Tr under s. 89(1) - adjusted taxable income.