News of Note
Technip – Delhi High Court finds that a major installation project is not a PE and that charges for use of the installer’s own equipment are not royalties for equipment use
Email this ContentA Singapore company (“Technip”) installed a marine crude oil receiving facility for an Indian company (“IOCL”) at a contract price of U.S.$18.6 million. Although the facility belonged to IOCL, its installation required Technip to use its own barges containing specialized equipment, with 68% of the contract price allocated to this use.
The definition of “royalties” in the Singapore-India Treaty (like the Canada-India Treaty) included payments for the use of industrial or commercial equipment. In rejecting the Indian authority’s argument that the barge charges were royalties, the Court stated:
There is a difference between the use of the equipment by [Technip] ‘for’ IOCL and the use of the equipment ‘by’ IOCL. Since the equipment was used for rendering services to IOCL, it could not be converted to a contract of hiring of equipment by IOCL.
Technip’s profit instead was exempt under Art. 7. The Court stated:
Under Article 5(3) [Technip] can be said to have a PE in India only if the installation or construction activity is carried on in India for a period exceeding 183 days in any fiscal year. [Technip] was … present in India… for 41 days during 2008-09 for rendering the contract of service to IOCL.
Neal Armstrong. Summaries of Technip Singapore Pte Ltd. v. Director of Income Tax, W.P (C) No. 7416/2012 (Del HC) under Treaties, Art. 12, Art. 5.
CRA, reversing position, indicates that it is not precluded from acting on requests by a bankrupt individual to open up statute-barred years
CRA has reversed an earlier position that only the trustee of a bankrupt individual, may make a request CRA to amend a tax return after the normal reassessment period for a taxation year of the individual prior to bankruptcy (within the 10 year limitation period)– so that CRA now considers that it is permitted to act on such a request from the bankrupt individual.
Neal Armstrong. Summary of 8 March 2016 Memo 2015-0614421I7 under s. 152(4.2).
CRA finds that the FX loss denial rule in s. 261(21) cannot apply to an FX hedging contract between a Canco which has the Canadian dollar as its functional currency and its parent which uses another currency
S. 261(21) denies FX losses incurred by a taxpayer in transactions with related persons who do not have the same tax-reporting currency at any time while those losses accrued.
CRA considered that this rule did not apply to deny an FX loss sustained by a Canadian subsidiary (“Holdco”) of a non-resident parent (“Parent”) on hedging agreements it entered into with Parent to hedge its FX exposure on a U.S. dollar loan it had made to a Canadian subsidiary of Holdco which, unlike Holdco, had the U.S. dollar as its reporting currency.
The key point is that “tax reporting currency” is defined as the currency in which the taxpayer’s “Canadian tax results” are determined. Although, in ordinary parlance, the functional currency of Parent presumably was something other than the Loonie, any of its Canadian tax results would have been determined in Canadian dollars. Thus, the tax reporting currency of Holdco and Parent was the same, so that s. 261(21) could not apply – or, “alternatively, if Parent did not have any Canadian tax results for the taxation years in which the Hedging Agreements were outstanding, it would not have had a tax reporting currency for those years,” which would point to the same conclusion.
Neal Armstrong. Summary of 9 March 2016 Memo 2015-0612501I7 under s. 261(20)(b).
CRA might apply s. 15(1), but likely not s. 56(2) or 246(1), where a family member subscribes nominal consideration for Opco shares and receives a large discretionary dividend
CRA appears to consider that in the scenario where a company owned by Mr. A ssues a share to Mrs. A for nominal consideration, and then pays a substantial dividend to Mrs. A, it could be difficult to seek to apply s. 56(2) in light of Neuman, but it is more likely that s. 15(1) could be applied “particularly if the amount that is being paid by Mrs. A as consideration for the share does not represent the fair market value of such share at the time of subscription.”
It is quite unlikely that CRA would try to apply Kieboom, under which (in its view) “Mr. A would be considered to have disposed of a… right to dividends in Opco to Mrs. A.” As the s. 73(1) rollover would apply, this disposition by Mr. A would be at cost.
Neal Armstrong. Summaries of 14 March 2016 T.I. 2016-0626781E5 under s. 15(1), s. 56(2) and s. 246(1).
CRA considers that a partnership with functional currency partner must file T5013 return and slips with it in the functional currency
Where one or more of the partners of a partnership has made a functional currency election, CRA considers that the partnership must file its T5013 return and slips with CRA in the elected functional currency. “Separate T5013 slips in Canadian dollars must be prepared by the partnership and provided to the non-electing partner(s) but these slips are not to be filed with the Canada Revenue Agency.”
Neal Armstrong. Summary of 2016-0642011E5 under Reg. 229(1).
CRA considers that the operation of a price adjustment clause to reduce preferred shares’ redemption amount to below the shares’ “specified amount” can result in full Part VI.1 tax
Ss. 191(4) and (5) generally exclude deemed dividends, arising on the redemption of taxable preferred shares, from Part VI.1 tax to the extent that the redemption proceeds do not exceed a qualifying specified amount contained in the share terms. CRA effectively considers that the specified amount must be a specific dollar amount (not exceeding the fair market value of the consideration for which the shares were issued), which will not be considered to have changed on the subsequent operation of a price-adjustment clause on the redeemed shares’ redemption amount. Accordingly if, following preferred shares’ redemption, their redemption amount is adjusted upwards, the originally-calculated deemed dividend will continue to be excluded from Part VI.1 tax, but the additional deemed dividend arising from such operation of the price adjustment clause will not be excluded.
On the other hand, if the PAC were to become operative to reduce the redemption amount to an amount that is less than the specified amount, the requirement in subsection 191(4), that the specified amount not exceed the fair market value of the consideration for which such shares were issued, would not be met. As a result, the entire amount of the original deemed dividend would be disqualified as an excluded dividend for the purposes of subsection 191(4).
Neal Armstrong. Summary of 4 May 2016 T.I. 2016-0634551E5 under s. 191(4).
Income Tax Severed Letters 15 June 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Markou – Tax Court of Canada finds that it has jurisdiction, in considering an assessment’s correctness, to determine the existence of equitable remedies
A Quistclose trust (as described by C. Miller J) provides an equitable remedy to a lender where it has lent to a borrower for a specific purpose and it is exposed to the risk of other creditors snatching the advanced funds before the borrower uses them for the intended purpose.
C. Miller J rejected a Crown submission that he lacked the jurisdiction to determine whether a Quistclose trust attached to funds lent to help fund leveraged donations. Although the Tax Court lacks jurisdiction to declare that there is a Quistclose trust, it has the jurisdiction to figure out whether taxpayer assessments are correct, and this requires that the “Tax Court… look at a taxpayer’s circumstances and make a determination as to what facts are true and what legal and equitable rights are available to the taxpayer.”
He went on to make a Rule 58(1) determination that no Quistclose trust attached to the funds advanced by the lender because, under his interpretation of the partially agreed statement of facts, the funds essentially were advanced by the lender directly to the charity so that, on a realistic view, they did not pass first through the hands of the borrower taxpayers.
Neal Armstrong. Summaries of Markou v. The Queen, 2016 TCC 137 under s. 104(1) and Statutory Interpretation – Interpretation Act, s. 8.1.
CRA indicates that a U.S. revocable living trust is not a bare trust
CRA maintained its position (notwithstanding a submission that De Mond was to the contrary) that a (U.S.) revocable living trust is a true trust and not a bare trust given that it has remainder beneficiaries. CRA also indicated that as the capital interests of the remainder beneficiaries are not acquired as a consequence of death (i.e., although the death of the settlor of the trust results in them receiving their remainder interests, this does not occur under a will), s. 70(5)(a) does not deem them to acquire their capitol interests at fair market value. (S. 107 presumably applies, but this was not discussed.)
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.10 under s. 104(1) and s. 70(5).
Société générale valeurs mobilières – Tax Court of Canada finds that a Brazilian tax sparing provision did not permit the taxpayer to shelter Canadian-source income
Although there was limited illumination in the questions of law posed by the Crown under Rule 58(1), the SGVM case seemed to entail the question of whether a tax sparing provision in the Canada-Brazil Treaty, which deemed a Canadian taxpayer to have paid 20% Brazilian withholding tax on interest received by it from Brazil, had the effect of providing to it a Canadian foreign tax credit equal to the amount of that fictional tax, even though its effective Canadian tax rate on that interest income was much lower than 20% (perhaps because of applicable leverage). This question turned on the meaning of a proviso in the Treaty, which stated that the FTC otherwise required by the Treaty to be accorded by Canada:
shall not… exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.
Paris J, in rejecting the taxpayer’s position (and affirming the Crown's position that the FTC effectively should be limited to the low effective Canadian tax rate on the Brazilian interest income), stated, among many other things:
It seems unlikely that the tax sparing provision was intended…to operate to shelter not only Brazilian interest income from Canadian tax, but income from other sources unrelated to Brazil as well. …
In addition, the provision quoted above was similar to the equivalent in the 1977 OECD Model Convention, except that the OECD provision used the word “attributable” rather than “appropriate” (although, both provisions used “correspondant” in their French versions). Paris J noted that the related OECD Commentaries stated that the limitation on the FTC deduction is “normally computed as the tax on net income, i.e. on the income from [the State of source] less allowable deductions.”
Neal Armstrong. Summary of Société générale valeurs mobilières inc. v. The Queen, 2016 TCC 131 under Treaties – Art. 24.