News of Note
Boettger – Court of Quebec finds that an Alberta trust whose trustee’s role was passive was resident in Quebec
Email this ContentAn Alberta trust was found by Lavigne J to be resident in Quebec, on the basis of significantly weaker facts than in Discovery Trust (which was not cited to her). The settlor and beneficiary (his wife) were unfamiliar with the sole trustee (an Alberta lawyer), who instead was a contact of the Montreal law firm (and who could be removed by the settlor at any time). The most significant act of the trustee was something he was directed to do under the trust deed and thereafter there was essentially nothing for him to do other than send in the trust tax return along with payment. Lavigne J stated: "The role of the Trustee was not to manage and grow the assets of the NS Trust but rather to hold them passively and follow the detailed steps in the Plan dictated by the [professional advisors]."
Neal Armstrong. Summary of Boettger, trustee of Nancy Smith Spousal Trust v. ARC, 2015 QCCQ 7517 under s. 2(1).
Birchcliff – Tax Court of Canada finds that using a diverted private placement to avoid an acquisition of control of a lossco was abusive – and that the private placement was an avoidance transaction notwithstanding its “overarching” non-tax purpose
A newly-launched public corporation ("Birchcliff") accessed the losses of a lossco ("Veracel") in order to shelter the profits from producing oil and gas properties which it was acquiring. Private placement investors were told that they would subscribe for subscription receipts for Veracel rather than Birchcliff common shares, which was not a problem to them because Veracel was to be amalgamated with Birchcliff, with the subscription proceeds applied to the properties’ purchase. As they got a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided. The original Veracel shareholders got a modest preferred share interest in Amalco, which was redeemed for cash.
Hogan J found that although "the overarching purpose behind…the sale of subscription receipts by Veracel was to raise equity financing for the [properties’] acquisition, this does not provide a bona fide non-tax reason for having Veracel rather than Birchcliff issue the subscription receipts," so that such issuance was an avoidance transaction. This contrasts with a Spruce Credit Union approach, which would focus on the transaction’s primary non-tax purpose.
The transaction also was abusive under s. 245(4) as "Parliament did not want amalgamations and reverse takeovers being used as techniques to avoid an acquisition of control in situations where the original Lossco shareholders do not collectively receive shares representing a Majority Voting Interest in the combined enterprise."
The Crown unsuccessfully argued that the new investors’ transitory majority share ownership of Veracel was a "sham" notwithstanding this step occurred under a Plan of Arrangement (albeit, in Alberta), and that their collective participation in the transactions (including giving proxies to two officers) constituted them as a "group of persons."
Neal Armstrong. Summaries of Birchcliff Energy Ltd. v. The Queen, 2015 TCC 232 under s. 245(4), s. 245(3), s. 111(5)(a) and General Concepts – sham.
Holding companies may be able to carry forward losses following an acquisition of control
Where a parent corporation (or an intermediate managementco/holdco) is holding its investments in subsidiaries as part of a business, this suggests that its non-capital losses (e.g., from interest and financing expenses) can be carried forward following an acquisition of control for deduction from income from the same source such as dividend income from subsidiaries.
As a break fee should be viewed as being received pursuant to a pre-acquisition agreement for the acquisition of shares on capital account, an application of the analogous jurisprudence on the disposition of option contracts suggests that the break fee generally will be received on capital account. Given the "perfect circularity" of the s. 14 and 39 rules, it is unclear whether the break fee receipt would give rise to a capital gain or eligible capital amount.
Neal Armstrong. Summaries of Ian Gamble, "Income from a Business or Property: General Principles and Current Issues", 2014 Conference Report, Canadian Tax Foundation, 5:1-32 under s. 111(5)(a), s. 95(2)(a)(ii)(B) and s. 9 – capital gain v. profit – contract.
Responding to Anson, the UK Revenue states it will continue to treat LLCs as opaque
HMRC ambiguously stated that the Anson decision "means that where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies."
I understand from a senior U.K. correspondent of Nat Boidman that the "treating" is by HMRC rather than the IRS. He notes that HMRC have long regarded US LLCs as "opaque" (see INTM180030, which is a country-by-country listing of entities as transparent or opaque for U.K. income tax purposes), and are effectively saying they will continue to do so.
Neal Armstrong. Summaries of [U.K] Revenue and Customs Brief 15 (2015): HMRC response to the Supreme Court decision in George Anson v HMRC (2015) UKSC 44 and INTM180030 - "Foreign entity classification for UK tax purposes: List of Classifications of Foreign Entities for UK tax purposes" under s. 248(1) – corporation.
“Only in the most serious cases of non-compliance…does the CRA turn to revocation” of a charity
CRA conducted 840 audits of charities in the 2013-14 audit program, plus some additional political activities audits. Of the 840 audits, 513 resulted in (only) "education letters,"137 in compliance agreements, 5 in "sanctions" (presumably monetary penalties), 34 in revocation notices (and 20 in voluntary revocations). "Only in the most serious cases of non-compliance—for example, when an organization has a previous record of non-compliance, when the non-compliance has had a substantial adverse effect on others, or when an organization cannot or will not take steps to bring itself into compliance—does the CRA turn to revocation." CRA "audit[s] all registered charities that play a role in a tax shelter gifting arrangement."
"[I]n order to demonstrate that it is carrying on its own activity, a registered charity must maintain direction and control over the use of its resources. ... A properly structured agency or joint venture agreement can help demonstrate direction and control. Even when an agreement exists, however, the charity must ensure that it is monitored."
Neal Armstrong. Summaries of Cathy Hawara, Director General, Charities Directorate, "The CRA Charities Directorate's Approach to Compliance", 2014 Conference Report, Canadian Tax Foundation, 37:1-10 under s. 149.1(2), s. 149.1(1) – charitable organization, charitable foundation, ineligible individual, s. 149.1(1.1), s. 188.1(9).
Condo developers have structured to avoid income tax on their condo profits
Condo developers have been avoiding corporate income tax on the profits of condo sales. All the condo sales profits are realized in a subsidiary LP of Projectco, the profits are lent to the developer, Projectco pays stock dividends to the developer to increase its basis in the Projectco shares, and the developer sells its Projectco shares to a third party with shelter before the LP year end for the year of the condo sales.
The sale price of the Projectco shares will exceed the amount by which Projectco's net asset value exceeds the full amount of its latent tax liability. This has a complicating effect on the determination of the extent to which the developer will avoid gain on the Projectco share sale given the possibility (based on VIH) that the fair market value of shares of a corporation may be reduced by the full liability for tax on the sale of the corporation's assets and a CRA view that safe income is reduced by latent tax.
The developer takes the position that the safe income of Projectco includes its share of the partnership income up to the safe income determination time, notwithstanding that this income is not allocated to it. However, in 2012-0471021E5, CRA reversed position and indicated that the partnership safe income attributable to shares of a corporate partner to which the rules in section 34.2 apply should be the adjusted stub period accrual for the year (which, for the Projectco LP, would be nil, as none of the condo sales occurred in the prior fiscal period.)
There is at least one pending Tax Court case in which this structuring is being challenged.
Under the amended s. 95(2)(a)(i), it generally will be preferable for real estate development LLCs (or LPs) held by a CFA to be managed by a management subsidiary LP of the CFA, as each separate development entity would not need to use the equivalent of more than five employees of the management LP in its project.
Neal Armstrong. Summaries of Bruce Sinclair, "Current Topics in the Taxation of Real Estate Development", 2014 Conference Report, Canadian Tax Foundation, 12:1-24 under s. 55(2), s. 160 and s. 95(2)(a)(i).
CRA considers that non-residents servicing Canadians over the phone are not rendering services in Canada
A Canadian company which pays a non-resident call centre to service its mostly Canadian customers would not withhold under Reg. 105 on the fees of the call centre, on the basis that the call centre was not rendering services in Canada.
Presumably the same would apply to a New York investment dealer which attends Toronto meetings by telephone.
Neal Armstrong. Summary of 9 September 2015 T.I. 2014-0563611E5 F under Reg. 105(1).
Income Tax Severed Letters 30 September 2015
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Great-West Life – Tax Court indicates that ancillary taxable services described in the “financial service” definition generally will be ignored
A third party (Emergis) provided automated claims processing services to Great-West Life, which administered or insured various client drug plans, so that the prescription drug claim of an employee would be processed at the pharmacy counter upon presenting her magnetic card.
Owen J ultimately found that the charges of Emergis to Great-West for this service were taxable under the Financial Services and Financial Institutions (GST/HST) Regulations, as they were "quintessentially administrative in nature." More interestingly, he found that in the absence of this Regulation, the service would have been exempt as being for the payment of insurance policy claims – notwithstanding that the Emergis service entailed the provision of taxable supplies described in para. (r.4) of the financial services definition, e.g., collecting, collating or providing information. He stated that "those services do not represent the essential character or substance of the supply, which is paying drug benefits to plan members."
This "essential character" approach means that (r.4), which refers to services which merely are preparatory or provided in conjunction with something else, will usually not apply, as these components of what usually is a single supply generally will not give the supply its "essential character," i.e., what the recipient is really paying for.
Neal Armstrong. Summaries of Great-West Life Assurance Company v. The Queen, 2015 TCC 225, under Financial Services and Financial Institutions (GST/HST) Regulations, s. 4(2) and s. 123(1) – financial service – (f.1), (r.4) and (r.5).
CRA considers that an LOI does not represent a s. 251(5)(b) right if it is not a contract
When questioned on whether a non-binding letter of intent to acquire shares gave rise to a s. 251(5)(b) right over those shares, CRA indicated that this turned on "whether the LOI constitutes a contract, in equity or otherwise" – which was a legal question it was not prepared to pass on in the context of an external technical interpretation.
CRA appears to have interpreted the reference in s. 251(5)(b) to "a right under a contract, in equity or otherwise" as referring to a contractual right, whether equitable or otherwise, rather than considering "that the 'right' referred to in paragraph 251(5)(b) is not confined to rights arising under a contract, but extends to rights arising in 'equity or otherwise', apart from pure contract" (Rostal).
Neal Armstrong. Summary of 7 July 2015 T.I. 2014-0552711E5 under s. 251(5)(b).