News of Note
Folio reference to Mark Resources fails to acknowledge its obsolescence
Email this ContentIn Folio S3-F6-C1, CRA indicates (perhaps somewhat contrary to TDL and Swirsky) that it is only in quite limited circumstances that it will consider investments in common shares to not be an eligible use of borrowed money. However, it then notes that in Mark Resources, where borrowed money was used to fund a cross-border investment in a U.S. Lossco, the interest deduction was denied because "the real purpose of the borrowing was to enable the Canadian corporation to absorb into its income the losses of its foreign subsidiary."
This reference is "puzzling." Leaving aside that the scheme would no longer work anyway, "Mark Resources is a clear outlier" as it departs from the s. 20(1)(c) (largely direct) use test as subsequently clarified by the Supreme Court of Canada (e.g., in Singleton).
Neal Armstrong. Summary of Nathan Boidman, Héléné Gagné, and Michael Kandev, "Interest Deductibility in Canada: What's the Fuss?", Tax Notes International, July 13, 2015, p. 16 under s. 20(1)(c).
CRA treats the cost of gift cards redeemable at a supermarket as food and beverage expense
S. 67.1(1) denies the deduction of 50% of the cost of food and beverages, and an exemption from this rule in s. 67.1(2)(a) appears to be restricted mostly to restaurants, bars and caterers rather than to any purchase made in the ordinary course of business.
CRA considers that the cost of gift cards purchased for promotional purposes (e.g., to thank customers who attend marketing presentations) will be treated as a food and beverage expenditure subject to the 50% limitation if the cards are "exchangeable for merchandise in an establishment that is primarily engaged in selling foods and beverages," e.g., a supermarket (unless the business can establish that in fact the cards were exchanged for something else).
Neal Armstrong. Summary of 4 November 2014 T.I. 2014-0521211E5 F under s. 67.1(1).
Income Tax Severed Letters 29 July 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
North American Palladium will be recapitalized through debt being exchanged for common shares
It is proposed that $345M of the debt of North American Palladium (including a fair amount of interest that accrued at a 19% rate) be exchanged under a Plan of Arrangement for treasury common shares, with the existing common shareholders thereby being diluted down to 2%. 10 days later, but also under the same Plan of Arrangement, the common shareholders will be issued rights (which will be listed on the TSX) to acquire further common shares. The two principal former debt holders (Brookfield and Polaris) will "backstop" the rights offering (so as to effectively guarantee that the target equity will be raised), but in a manner so as to comply with the s. 15(1)(c) safe harbor for rights offerings. Ineligible (non-North American) holders will not be permitted to exercise rights, which instead will be sold on their behalf.
No tax risk factors are disclosed (the debt forgiveness rules are too boring for words).
The exchanged debt would include an exchange of debentures (for which there is tax disclosure) and should qualify as a tax-free recapitalization for U.S. federal income tax purposes.
Neal Armstrong. Summary of under North American Palladium Circular under Other – Recapitalizations.
Where a corporation confers a benefit on the wife of a shareholder, CRA will apply the s.15(1.4)(c) inclusion to that shareholder rather than the other shareholders (his brothers)
S. 15(1.4) extends the operation of s. 15(1) by assimilating benefits conferred on an individual who does not deal at arm's length with, or is affiliated with, a shareholder of a corporation, to benefits conferred on the shareholder – except where the benefit is (already) included in the income of the individual or another person. Where the corporation, with four equal shareholders who are siblings, confers a benefit on the spouse of Sibling 4, CRA arguably has a choice as to which sibling will have the s. 15(1.4)(c) income inclusion, given that the spouse is related to each sibling. Not surprisingly, CRA will include the benefit in Sibling 4's income only. CRA was not asked, and it might not always be clear, whether the same approach would apply where the other shareholders are instead parents, children or personal holding companies.
Neal Armstrong. Summaries of 24 June 2015 T.I. 2015-0575911E5 F under s. 15(1.4)(c), s. 56(2) and s. 246(1).
CRA confirms that incidental business activities in Canada generally do not constitute carrying on business in Canada
In Folio S5-F2-C1, CRA provides general guidelines for determining in which countries a business of a Canadian taxpayer is carried on for foreign tax credit purposes.
In the course of a general response, CRA has referenced the same guidelines as applying for purposes of determining whether a non-resident company is carrying on business in Canada. Accordingly, a non-resident company may be able to rely on a helpful statement in S5-F2-C1 that "if…one activity of a business is clearly incidental to a predominant one, the incidental activity is not considered when determining in which country or countries the business is carried on."
Neal Armstrong. Summary of 19 June 2015 T.I. 2013-0475751E5 under s. 115(1)(a)(ii).
Income Tax Severed Letters 22 July 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on classic pipeline transactions with one year delay before amalgamation of Newco, and phased repayment of note thereafter
CRA has issued a s. 84(2) ruling on a classic pipeline transaction in which a spousal trust, following the death of the surviving spouse, will transfer its shares of a Holdco (which carries on business through a grandchild corporation) to a Newco for a note, with Holdco and its subsidiary being wound-up into or amalgamated with Newco after a year. The note will be distributed to the beneficiaries if not retained in the trust but, during the first year following the wind-ups or amalgamation, will not be repaid at a greater rate than XX% of the initial note principal per quarter. Based on 2014-0559481R3 F, XX% might be 25%.
Neal Armstrong. Summary of 2015 Ruling 2014-0563081R3 under s. 84(2).
Tallon – Federal Court of Appeal finds that a warm climate is not a medical service
In reversing the Tax Court below, Ryer JA denied medical expense tax credits on $18,000 of travel, accommodation and meal costs of an extended trip of the taxpayer and her husband to Thailand and Indonesia, whose climate was much easier on her prosthetic joints than Thunder Bay winters. He found that "because the salutary effects of the warm Thai and Indonesian climates were not provided to the Taxpayer by a person or hospital, those effects cannot constitute a medical service."
Nela Armstrong. Summary of The Queen v. Tallon, 2015 FCA 156, under s. 118.2(2)(g).
A Canadian corporate group is applying for the same loss consolidation rulings on an annual basis
The same Canadian corporate group has been applying on an annual basis for rulings on transactions to indirectly shift losses from a holding company with interest expenses (Lossco) to a subsidiary (Opco) which has listed preference shares and does not wish to incur debt. Accordingly, each year Lossco uses the typical triangular loss-shifting techniques to transfer losses to a newco subsidiary (Aco), and then transfers Aco to Opco to be wound-up into Opco under s. 88(1.1). The Additional Information states that it is anticipated that the same exercise "will be undertaken at the beginning of each future taxation year of Lossco."
Ruling applications like this, where there is no uncertainty as to the Directorate’s response, are becoming somewhat less common. Eight months ago, Mickey Sarazin noted that the inventory of rulings has decreased from around 500 about 10 years ago to about 120 now.
Neal Armstrong. Summary of 2015 Ruling 2014-0563151R3 under s. 111(1)(a).