News of Note
CRA confirms that the FAPI of a widely-held non-resident unit trust which is majority-owned by an investment dealer or other FI generally must be computed under the mark-to-market rules
Email this ContentWhere s. 94.2(2) deems a non-resident unit trust whose units are majority-owned by an investment dealer, or other taxpayer subject to the mark-to-market (or specified debt obligation) rules ("FI"), to be a controlled foreign affiliate of FI, then the CFA will itself generally be deemed to be a FI, so that in computing the foreign accrual property income of the CFA, the mark-to-market and SDO rules would apply. In commenting on this situation where the FI lacked the data to do this computation properly in Canadian dollars, CRA refused to provide any comfort that it would permit the use of a (rough and ready) "proxy" method.
Neal Armstrong. Summaries of 9 July 2015 T.I. 2013-0475421E5 under s. 142.2(1) – financial institution, s. 95(2)(f.14).
Coast Capital Savings Credit Union – Tax Court of Canada finds that “sham” is only a sword for CRA, not a shield for the taxpayer
The trustee of RRSPs was duped into purchasing shares of Canadian companies from offshore entities at a price substantially in excess of their value, so that funds of the RRSPs effectively were stripped to offshore accounts. The trustee sought to amend its Notice of Appeal, from an assessment for failure to withhold under s. 116(5), by adding an assertion that the purchase transactions were shams.
In denying this request, V. Miller J stated: "in a tax case, a court will make a finding of ‘sham’, only when it is the Minister who is deceived."
Neal Armstrong. Summaries of Coast Capital Savings Credit Union v. The Queen, 2015 TCC 195 under General Concepts – Sham and s. 116(5).
New s. 55(3)(a) requires that there be an outside basis reduction for a spinning-off corporation
The exemption under the proposed version of s. 55(3)(a) requires that the exempted dividends arise under s. 84(3) (or (2).) Accordingly, where an intermediate holding company (Holdco) wishes to have its subsidiary (Opco) spin off a business to another Holdco subsidiary (Newco), so that Opco starts off by selling that business to Newco for preferred shares and retracting those prefs for a note, it no longer is possible (even ignoring CRA’s traditional unfavourable policy) to complete the spin-off through Opco dividending the note to Holdco (so that there is no reduction in the ACB of the Opco shareholding) and Holdco contributing the note back to Newco in consideration for shares. Instead, in order to generate a s. 84(3) dividend, Opco can distribute the note to Holdco as redemption proceeds for a portion of the Opco shareholding, before that note is contributed to Newco. This will result in a pro rata reduction in the ACB of that shareholding in Opco. However, Holdco will have full basis for its shareholding in Newco (i.e., a cost equal to the net fair market value of the business transferred to Newco).
On the other hand, if butterfly-style mechanics instead were used to spin-off the business to Newco, the resulting ACB of Holdco’s Newco shareholding would be equal to a pro-rata portion of its previous ACB in the Opco shareholding. Accordingly, the first (note distribution and contribution) mechanics generally produce a better result.
Neal Armstrong. Summary of Carla Hanneman, "Reorganization Strategies for Proposed Paragraph 55(3)(a)", Canadian Tax Focus, Vol. 5, No. 3, August 2015, p.8 under s. 55(3)(a).
Unpaid fees owing by Canco to FA potentially may give rise to a double income-inclusion to Canco
If Canco owes fees to FA, there potentially could be a double income inclusion to Canco (albeit, in different years) under ss. 90(6) and 78(1). The double inclusion might be addressed by filing a s. 78(1)(b) agreement. "However, it is not clear whether and how subsection 90(6) will apply to the loan that is then deemed to be made to the taxpayer (Canco) by the creditor (FA) on the first day of the taxpayer's third taxation year."
Neal Armstrong. Summary of Clara Pham, "An Unpaid Amount Could Be an Upstream Loan", Canadian Tax Focus, Vol. 5, No. 3, August 2015, p.5 under s. 90(6).
Income Tax Severed Letters 19 August 2015
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on hybrid pipeline transaction
CRA has ruled on a sort of hybrid post-mortem transaction in which a portion of the estate’s common shares of "Investments" (which holds marketable securities and cash) are redeemed in its hands for a promissory note (thereby giving rise to a capital loss which will be carried back under s. 164(6) to the terminal year) and it sells the balance of its shares to a "Newco" in consideration for a Newco promissory note. Under the latter pipeline transaction, Investments will be amalgamated with Newco after one year, and the notes will thereafter be repaid at the rate of 25% per quarter. These 12 mo./25% parameters also managed to escape the CRA propensity for over-redaction in 2014-0559481R3 F.
Neal Armstrong. Summary of 2014 Ruling 2014-0540861R3 F under s. 84(2).
CRA rules on transferring already-earned profits to an affiliate through use of a partnership
It may be possible to transfer profits which already have been earned to a Lossco in the same group in order to access Lossco’s non-capital losses. CRA has ruled on a transaction in which (to simplify somewhat) the units of an LP which already has earned profits for the year will be transferred to the Lossco before the fiscal year end of the LP – so that most of those LP profits will be allocated to Lossco. The partnership agreement for LP will be amended "to clarify that it allocates its income for income tax purposes only to those partners that are partners at the end of its fiscal period."
Neal Armstrong. Summaries of 2014 Ruling 2013-0516071R3 under s. 111(1)(a), s. 34.2(14) and s. 96(1)(f).
Tele-Mobile – Tax Court of Canada rejects an attempt to bifurcate U.S.-to-Canada cell phone calls into a non-taxable U.S.-roaming service and a taxable Canadian leg
When Telus charged its Canadian customers for calls made from the U.S. to Canada, its invoices contained a separate charge for a roaming service, relating to the part of the service that was performed in the U.S., on which it did not charge GST, and a second charge for connecting the call from the U.S. to Canada, which it conceded was subject to GST. C Miller acknowledged that in the context of local calls in the U.S., a roaming service had "commercial efficacy as a standalone supply." However, in this context of cross-border long distance calls, insofar as the customers were concerned they were getting a "seamlessly integrated" service of the long distance call. As there was only a single supply, all the charges therefor were subject to GST under ETA s. 142.1(2)(b)(ii) given that a part of the supply (i.e., the receiving of the telecommunication in Canada) was performed in Canada.
Similar issues respecting whether a supply can be bifurcated arise, for example, under ETA 142(1)(g), which deems a supply of a service to be made in Canada if the service "is to be performed in whole or in part in Canada."
Neal Armstrong. Summary of Tele-Mobile Company v. The Queen, 2015 TCC 197 under ETA, s. 123(1) – supply.
Discovery Trust – a trust, whose Alberta trustee (Royal Trust) followed all the requests of the Newfoundland beneficiaries after careful review, was resident in Alberta
A trust with Newfoundland beneficiaries but whose sole trustee was the Calgary office of Royal Trust was resident in Alberta, notwithstanding that essentially everything it did was on the recommendation of the non-Alberta advisors for the Newfoundland beneficiaries. Royal Trust carefully reviewed each suggested trust action first, before agreeing to it, to ensure that it seemed to be in the interests of the beneficiaries – which indicated that Royal Trust was an independent trustee rather than that the trust’s central management and control was in Newfoundland.
Neal Armstrong. Summary of Discovery Trust v. MNR, 2015 CanLII 34016 (NL SCTD) under s. 2(1).
CRA considers that life insurance policy premiums on a corporate-owned policy reduce safe income on hand if they do not increase the policy’s CSV
Where prior to a sale by Holdco of all the shares of Opco to an arm's length purchaser, Opco transfers a life insurance policy on the life of Holdco’s shareholder to Holdco through a dividend-in-kind, CRA considers that the resulting gain to Opco (based on the policy’s cash surrender value ("CSV")) will not increase the safe income on hand ("SIOH") for purposes of the sale because that time will be before the realization of that gain.
The (non-deductible) policy premiums that had been paid by Opco would reduce its SIOH except to the extent that their payment increased the policy’s CSV and thereby increased the accrued gain on the shares of Opco.
Neal Armstrong. Summaries of 14 May 2015 CLHIA Roundtable, Q. 5, 2015-0573821C6 under s. 55(2) and s. 148(7).