News of Note
The carve-out rule potentially can apply in the year of acquiring a foreign subsidiary without contradicting the calendar application of the fresh start rule
Email this ContentIf 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).
Open market repurchases by the issuer of US dollar notes may produce a better tax result than a tender offer
Where a Canadian issuer makes a tender offer for its notes, which have an accrued foreign exchange gain but which also trade at a substantial discount to their US dollar principal, the issuer will realize a capital loss under s. 39(2), and a forgiven amount which generally will offset other more valuable tax attributes rather than such loss. Contrast this with open market purchases of the same notes which might result in only a smaller capital gain under s. 39(3). This result depends in part on 2008-0302511I7, where CRA considered that s. 80 should not apply to an open-market purchase to which s. 39(3) applies
Neal Armstrong. Summary of Carrie Smit, "Repurchasing Underwater US Dollar Notes", International Tax (Wolters Kluwer), August 2015, No. 83 under s. 39(3).
CRA may permit non-pro-rata sharing by partners of withholding taxes borne at partnership level
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 considers that contributions of capital to a trust may constitute consideration
The definition of a personal trust refers inter alia to "an inter vivos trust no beneficial interest in which was acquired for consideration payable directly or indirectly to…the trust." Without much explanation, CRA indicated that where the beneficiaries of an inter vivos (non-unit) trust make additional contributions of capital to the trust in proportion to their respective fixed entitlements to a percentage of trust capital and income, it could not confirm that these contributions do not disqualify the trust as a personal trust.
Neal Armstrong. Summary of 30 July 2015 T.I. 2015-0596841E5 under s. 248(1) – personal trust.
CRA implies that “immediately before” can refer to a state of affairs on completion of the immediately preceding (and nearly contemporaneous) transaction
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).
Income Tax Severed Letters 9 September 2015
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Burlington Resources – B.C. Court of Appeal finds that cement provided to a well was part of an oil well service rather than being a sale of property for PST purposes
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).
CRA was willing to accept an unsigned prescribed HST rebate form if there was other evidence of its certification
An Ontario builder, who submitted multiple applications for the Ontario transitional new housing rebate, was missing the signatures of the house purchasers on the two sections of the from certifying that the information on the forms was correct and assigning the rebate to the builder. Headquarters stated:
The CRA should not accept that an assignment of the [rebate] has occurred, or pay any amount of a rebate to a supposed assignee, unless both sections…are signed by the individual (or there is other evidence of the individual having certified the information in those sections) and the CRA is satisfied as to the validity of the assignment.
Although the italicized passage shows a hint of flexibility, one suspects this may not help the hapless builder.
Neal Armstrong. Summary of 9 December 2014 Interpretation 165597 under ETA, s. 256.21(7).
Has anyone seen a (non-cash) specified right?
In simple terms, a "specified right" under the back-to-back loan rules is the right of a person to treat property as it if it were its own property. "Such a right would rarely if ever be granted in respect of a property used to secure a debt or other obligation, except possibly in the case of cash collateral."
Where Canco owes $50 to a Netherlands company (an intermediary under the back-to-back loan rules), which owes $40 to Caymanco and $100 to USCo, s. 212(3.3) rightfully would permit Canco to effectively designate $40 of its $50 debt as owing to USCo, thereby avoiding withholding tax at 25% on the $40. However, there is no such relief because the s. 212(3.3) rule applies only to debt that is subject to withholding under the back-to-back loan rule – and such withholding only applies where the ultimate creditor is in a jurisdiction with a lower withholding rate (i.e., 0% for the U.S.) than that of the intermediary (i.e., 10% for the Netherlands). On the other hand, the s. 212(3.3) relief is available where the lenders to the intermediary are resident in jurisdictions with a higher withholding rate (e.g., 15%) than that of the intermediary’s jurisdiction. This is anomalous.
Neal Armstrong. Summaries of John Lorito and Trevor O'Brien, "International Finance – Cash Pooling Arrangements," draft version of paper for CTF 2014 Conference Report under s. 18(5) – specified right, s. 212(3.3), s. 90(15) – specified debtor, s. 15(2.3), s. 227(6.1), s. 15(2), s. 212.3(10)(c), s. 95(2)(a)(ii)(B) and s. 261(21).
Ss. 143.3 and 143.4 are as badly drafted as they look
The definition of a "contingent amount" in s. 143.4 turns on the definition of a "right to reduce," which refers to a right (including a contingent right) to reduce or eliminate the amount which it is reasonable to conclude "will become exercisable." Discussions with Finance indicate that automatic adjustments are intended to be captured by this (i.e., not just adjustments exercised at the taxpayer's option).
It is suggested that the amount of the reduction in expenditure occurring under s. 143.4(2) is only the amount of the expenditure which potentially may be reduced rather than all of the expenditure.
It is unclear whether s. 143.4(2) applies only to unpaid amounts or whether it extends to refunds or reimbursement rights.
S. 143.4(3) permits the recognition of contingent amounts as they are paid in cash. This seems to suggest that there will be no reduction for a potential refund of a cash expenditure. However, if the right to reduce an expenditure arises in a subsequent year so that s. 143.4(4) applies, thereby generating a s. 12(1)(x) income inclusion in the subsequent year, there is no deduction under s. 143.4 if the amount in question is in fact ultimately paid.
Given that s. 143.3(3) generally denies any recognition of any cost of property acquired in consideration for issuing an option, and given that this rule may not apply to the issuance of options for cash, consideration should be given to issuing options for cash and applying that cash to purchase property that otherwise might have been acquired in consideration for the option.
Neal Armstrong. Summaries of Chris Falk, Stefanie Morand and Brian O'Neill, "Is there Always Certainty Regarding Tax Basis? – Limitations on Expenditures Pursuant to Sections 143.3 and 143.4," draft version of paper for CTF 2014 Conference Report under s. 143.4(1) – right to reduce, s. 143.4(2), s. 143.4(4), s. 143.3(2), s. 143.3(3)(a) and s. 143.3(5)(b).