News of Note

If on, say October 1, Canco acquires a non-resident corporation ("FA"), which carries on a passive business, s. 95(2)(k.1)(i) generally will apply to deem FA to have been carrying on its investment business in Canada from January 1 onwards of that year for purpose of computing its income from that business.  Russell and Montillaud suggest that "this is not the same as deeming [FA] to have been an affiliate from the beginning of the year," so that the carve-out rule in  "paragraph 95(2)(f.l) can apply to exclude from income, gains or losses that arose prior to [FA] becoming an affiliate without contradicting the rule in subparagraph 95(2)(k.1)(i)."

Neal Armstrong.  Summary of Grant Russell and Philippe Montillaud, "’Fresh Start’ Rules – on Becoming an Affiliate", International Tax Planning (Federated Press), Vol. XX, No.2, 2015, p. 1392 under s. 95(2)(k).

Although unclear, it appears that taxes imposed by a foreign jurisdiction under a domestic override of an existing treaty (or perhaps under a domestic anti-treaty shopping rule) qualify as "taxes" under general principles, so that the usual Canadian domestic foreign tax credit or deduction provisions apply.

In Folio S5-F2-C1, CRA indicates that the Canadian partner of a partnership which has paid foreign income tax generally is treated as paying its proportionate share of such partnership tax.  However, this statement is not intended to require a pro rata sharing of foreign withholding taxes borne on payments made to the partnership where the amount withheld is based on the withholding rate that would have applied to each partner.

Where a Canadian individual member of an LLC (which carries on an active business) receives distributions from the LLC which are sufficient only to fund his US tax liability on the LLC’s income, most of those US taxes will not be eligible for a foreign tax credit (but with eligibility for the s. 20(11) deduction).

Neal Armstrong. Summaries of Manjit Singh and Andrew Spiro, "The Canadian Treatment of Foreign Taxes," draft version of paper for CTF 2014 Conference Report under Treaties – Art. 24, s. 126(7) – non-business income, s. 20(11), 126(2), s. 104(22) and s. 113(1)(c).

CRA has ruled on a merger of two credit unions under which "Acquireco" will acquire all of the shares of the "Targetco" members under s. 85.1 in exchange for Acquireco treasury shares (with the exception of the Class D shares of Targetco, which will be redeemed for cash), with Targetco then being wound-up into Acquireco.

Even though the wind-up is to occur immediately after the share exchange, CRA was satisfied that Targetco qualified as a wholly-owned subsidiary of Acquireco "immediately before" the winding-up, as required for s. 88(1) to apply. This is reminiscent of 9336015, where CRA seemed to consider that since the Act contrasts series of transactions with transactions, it is implicit that each transaction in a series occurs immediately after the preceding transaction and not immediately after more remote transactions in the series – apparently even if the transactions occur in quick succession.

Neal Armstrong. Summaries of 2014 Ruling 2014-0530371R3 under s. 88(1) and s. 137(4.1).

Burlington Resources was found not to be the purchaser for BC provincial sales tax purposes of cement which was inserted into the well casings of wells drilled for it, on the basis that the cement had become real property by the time title to the materials passed to it. By implication, the supplier (BJ Services) instead was providing a service rather than selling cement, and the PST instead should have been paid on the materials purchases by BJ Services itself.

This case may be relevant to P3 projects, which provide that title to materials vests in the government agency as the work proceeds on the relevant facility.

Neal Armstrong. Summary of British Columbia v. Burlington Resources Canada Ltd., 2015 BCCA 19 under Provincial Sales Tax Act (B.C.), s. 1 – purchaser (h/t Robert G. Kreklewetz and Bryan Horrigan, "British Columbia Provincial Sales Tax and Oilfield Services", Sales and Use Tax (Federated Press), Vol. XIII, No. 1, 2015, p. 662).