News of Note
CRA has delegated much of the policy determination of what is CRCE to Natural Resources Canada
Email this ContentCRA has delegated the technical aspects of policy on what is Canadian renewable and conservation expense to Natural Resources Canada. For example, a listing of project development activities that are typically eligible as CRCE is contained in Appendix II of NR Canada’s Technical Guide to Canadian Renewable and Conservation Expenses (CRCE).
Neal Armstrong. Summary of 19 August 2015 T.I. 2015-0587981E5 under Reg. 1219(1).
Using a secondment arrangement may reduce complications when a non-resident provides the services of an employee to a Canadian affiliate
A non-resident who is assigning one of its non-resident employees to Canada may be able to avoid setting up a payroll account with CRA, and being considered to carry on business in Canada, by "seconding" (loaning out) the employee to its Canadian affiliate (Canco) in accordance with the IC-75-6R2 guidelines, so that Canco is treated by CRA as the employer and is "responsible" for the Canadian source deductions – even though the employee stays enrolled with the non-resident’s pension, equity compensation and other benefit plans. In particular, Canco may not have to actually pay remuneration to the seconded employee, so that the non-resident charges Canco for the employee's services and the charge-back (which ideally is reduced by the amount of the Canadian source deductions) is used by the non-resident to pay the seconded employee’s remuneration.
Neal Armstrong. Summary of Ron Choudhury, "An Overlooked Solution for Non-resident Employers", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24 No. 7, September 2015, p. 1643 under Reg. 104(2).
UK Revenue appears to be willing to ignore Anson (and relishes the passive voice)
The UK Supreme Court found that profits of a Delaware LLC belonged to the members as they arose, so that a UK member (Mr Anson) was considered for UK tax purposes to have been taxed on the same income in both countries. HM Revenue & Customs has now stated:
…[T]he [Anson] decision is specific to the facts found in the case. This means that where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on a trade or business.
Evidently, HMRC does not write as well as CRA. Presumably, it is irrelevant for UK tax purposes whether an LLC has elected to be disregarded solely for Code purposes, so that HMRC appears to be willing to treat an LLC as not being fiscally transparent even where it has so elected.
Neal Armstrong. Summary of [U.K] Revenue and Customs Brief 15 (2015): HMRC response to the Supreme Court decision in George Anson v HMRC (2015) UKSC 44 under Treaties – Art. 24.
Denison acquisition of Fission Uranium caps the number of Denison shares to be issued so as to avoid a reverse takeover
Denison is to acquire all the shares of Fission under a CBCA Plan of Arrangement in consideration for around 487 million Denison shares and nominal cash, so that Fission resident taxable shareholders desiring rollover treatment must elect under s. 85 – with the tax elections being generated and completed using a special dedicated website. Although it is expected that the pre-combination shareholders of Denison and Fission will own approximately 51.86% and 48.4%, respectively, of Denison post-Arrangement (excluding impacts of exercises of stock options and warrants), someone felt strongly that the Fission shareholders should not become majority owners of Dension - so that the exchange ratio of 1.26 Denison shares for each Fission share is subject to a cap on the total number of Denison shares issued on the exchange equal to the current number of Denison shares outstanding, minus 100,000.
Following the exchange, Denison will transfer its Fission Shares to a wholly-owned subsidiary (Subco), and amalgamate with Subco, with Subco as the survivor. (Such a non-continuation style amalgamation likely will qualify as an amalgamation for ITA s. 87 purposes - see 2006-0178571R3). The transaction is stated in the Plan of Arrangement itself to be intended to qualify as a forward triangular (D) reorganization under the Code. However, as Fission and Denison are believed to be a PFIC and not a PFIC, respectively, the PFIC rules may trigger taxable gain or income subject to tax at ordinary income tax rates plus an interest charge.
Neal Armstrong. Summary of Fission Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.
AB LLC – South Africa Tax Court finds that a client’s boardroom can be a PE of a consultant
5(1) of the OECD Model Treaty defines a permanent establishment as "a fixed place of business through which the business of an enterprise is wholly or partly carried on" and 5(2) states that the term "includes especially" places listed in subparas. (a) to (f). The OECD Commentary states these listed examples "constitute permanent establishments only if they meet the requirements of paragraph 1," i.e. they must also represent a fixed place of business.
A US corporation, which spent 15 months based in the boardroom in South Africa of a South African client providing consulting services, argued that this limitation also applied to the services PE paragraph (i.e., 5(2)(k)) of the US-South Africa Treaty, so that the corporation’s provision of the consultancy services for a period of more than 183 days was exempted under the business profits Article as it did not have a fixed place of business there. In rejecting this argument, Vally J noted inter alia that 5(2)(k) "is very different …[as] it does not refer to a place of work, but rather to a form of work."
However, even if the OECD comment applied, the client’s boardroom nonetheless constituted a fixed place of business (in contrast to Dudney, where "a sole individual providing services moved from one area to another.")
Neal Armstrong. Summaries of AB LLC and BD Holdings LLC v. Commrs. of South African Revenue Services, Case No. 13276, 15 May 2015, South Africa Tax Court under Treaties – Art. 5, Art. 7.
CRA is prepared to infer a refund request from a waiver
In clarifying 2012-0468081I7, CRA has stated that although a waiver itself does not extend the deadline for a taxpayer to apply under s. 164(1)(b) for an income tax refund, it will treat the waiver as such an application where "it is reasonable to conclude the waiver also contains an implicit request for a refund for the particular issue outlined in the waiver." Of course, it is preferable for the waiver to be explicit on this point.
Neal Armstrong. Summary of 15 June 2015 Memo 2015-0583081I7 under s. 164(1).
Income Tax Severed Letters 23 September 2015
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The FAT reinstatement rules likely are more restrictive than the underlying policy intent
The original intent of the foreign accrual tax reinstatement rules may have been to ensure that FAT - representing compensatory payments made to other members of the same U.S. (or other foreign) consolidated group for use of their losses - which has been denied because those losses are business losses, generally will be reinstated when those losses are fully utilized against the active business income of the group. If that is the object, there is a litany of instances where this has not or may not have been achieved under the wording of Regs. 5907(1.5) and (1.6).
More generally, it is not clear whether, in promulgating these Regulations, there was an intention to change the multi-year perspective which previously had been brought to bear by CRA in determining eligible FAT deductions, under which the taxpayer was permitted to judge what its tax payment each year related to by considering taxable income in other years.
Neal Armstrong. Summary of Adam Freiheit, "Reinstated Foreign Accrual Tax and the Multi-Period Perspective", Canadian Tax Journal, (2015) 63:2, 521-42, p. 521 under Reg. 5907(1.6).
Northern Property REIT proposes to acquire True North REIT under s. 132.2, with exchangeable unitholders offered a s. 97(2) election
Northern Property REIT ("NPR" - an Alberta trust), is proposing to acquire True North REIT (an Ontario trust) under an Alberta Plan of Arrangement involving minimal corporate steps. A substantial portion of the equity investment in True North REIT is in the form of exchangeable units in six subsidiary LPs. Holders are given the choice of exchanging their LP units for NPR units or for new redeemable units of the same partnerships, i.e., LP units which are redeemable for NPR units. The tax disclosure treats an exchange for such new redeemable LP units as being eligible for a s. 97(2) rollover.
Neal Armstrong. Summary of Northern Property REIT and True North REIT Circulars under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – REIT Mergers.
Hillis – Federal Court rejects arguments that the FATCA disclosure obligations of CRA should be read down in light of the Canada-U.S. Treaty
Although the Hillis suit is challenging the Canadian FATCA legislation primarily on constitutional grounds, a summary trial has dealt first with the non-constitutional arguments - including that the FATCA procedure, requiring CRA to automatically pass along to the IRS all the U.S. account holder information gathered for it under the FATCA rules by Canadian financial institutions, exceeds an implicit limitation imposed by Article 27 of the Canada-U.S. Treaty that only "relevant" information should be exchanged, i.e., only the account information for U.S. citizens who likely have a substantive liability for U.S. taxes. Martineau J rejected this argument (along with other Treaty-based arguments), noting that this interpretation would render the FATCA Intergovernmental Agreement "practically impossible to perform."
He also noted that the Crown took the position before him "that the IRS cannot use [FATCA] information to administer non-tax laws (such as the US Bank Secrecy Act) or in its dealings with federal entities (such as the Financial Crimes Enforcement Network of the US Treasury Department) who are involved in money laundering repression."
Neal Armstrong. Summaries of Hillis v. A.G. (Canada), 2015 FC 1082 under Treaties, Art. 27, Art. 26A and Art. 25.