News of Note
CRA indicates that the $10,000 safe harbour for Canadian employment income of U.S. resident is applied on calendar year basis even where she was a part-year resident
Email this ContentArt. XV, 2(a) of the Canada-U.S. Treaty provides a safe harbour, from the application of a general rule permitting Canada to tax the employment income of a U.S. resident derived from "an" employment exercised in Canada, where the remuneration from such remuneration does not exceed Cdn.$10,000. CRA considers that this safe harbour is applied on a calendar year basis so that if a Canadian resident becomes a U.S. resident on, say, December 1, but has income from the exercise of employment with his Canadian employer in December of under $10,000, he will be unable to access the safe harbour.
Given that it would be unusual for such an employee to continue performing his duties of employment in Canada for the same legal entity, this position may mostly be relevant where the individual receives some post-departure employment benefits from Canada.
Neal Armstrong. Summary of 10 February 2015 T.I. 2013-0484501E5 under Treaties – Art. 15.
CRA confirms that unpurchased goodwill must be valued as an asset used by an FA for purposes of determining if its shares are excluded property
The definition of "excluded property" of a foreign affiliate (FA1) includes shares of a foreign affiliate (FA2) of the taxpayer held by FA1 where all or substantially all of the fair market value of the property of FA2 is excluded property, such as property used or held by FA2 principally for the purpose of gaining or producing income from an active business carried on by it.
In this context (as well as in others such as the "small business corporation" definition), CRA considers that in this context goodwill which has been internally generated rather than purchased by a corporation qualifies as property that used by it – so that in the case of FA2, that goodwill should be taken into account in determining whether the shares of FA2 are "excluded property" of FA1. However, the requirement to determine whether such goodwill is satisfies the "principally" test may "require an apportionment of such use as between the active business of FA2 and the other activities of FA2."
Neal Armstrong. Summary of 6 March 2015 Memo 2014-0549761I7 under s. 95(1) – excluded property.
Income Tax Severed Letters 25 March 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Majority shareholders of Wheels Group agree to bear the full brunt of any proration required to constrain the overall mix of cash and share consideration paid under a Radian Logistics acquisition
Radian Logistics, a listed Delaware corporation, is proposing that its new ULC subsidiary acquire all of the shares of Wheels Group for cash or Radian Logistics shares under a Plan of Arrangement.
No rollover treatment is offered, i.e., the ULC will not issue exchangeable preferred shares. However, the Wheels majority shareholders (i.e., shareholders, including some of the individual company founders, holding 78% of the Wheels shares, who entered into a lock-up agreement with Radian) will agree to be subject to whatever proration will be necessary to ensure that those minority Wheels shareholders who validly elect for cash or Radian shares will not have their choice subject to proration. The absence of rollover treatment should be acceptable to the minority shareholders given this right to elect for full cash.
Neal Armstrong. Summary of Wheels Group Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
CRA finds that Part XIII tax withheld on a capital dividend paid to a s. 94 trust is not recoverable otherwise than through a s. 227(6) refund claim
Although a Canadian corporation is required under s. 94(4)(c) to withhold on a dividend paid by it to a non-resident trust which is deemed to be resident in Canada for various purposes by s. 94(3)(a), s. 94(3)(g) permits the trust to treat the withholding tax effectively as a Part I tax instalment if "the particular amount has been included in the trust’s income." This means that if the dividend subject to the withholding was a capital dividend, s. 94(3)(g) will not work. However, resort may instead be made to s. 94(3)(a)(viii), which provides that the Trust is recognized as Canadian-resident for purposes of "determining the liability of the trust…under Part XIII on amounts paid or credited…to the trust" – so that "an application for a refund of taxes withheld under subsection 227(6) may be appropriate."
On the other hand, s. 94(3)(g) will work to treat the Part XIII tax withheld on an ordinary dividend paid to the trust as effectively a Part I instalment payment even if the Trust is not subject to tax on this dividend as a result of distributing it and taking a s. 104(6) deduction – as the dividend amount is considered to have been included in its income.
Neal Armstrong. Summary of 25 February 2015 T.I. 2014-0517511E5 under s. 94(3)(g).
CRA agrees to certify the status of a partnership as a Canadian partnership at the request of an authorized representative.
CRA has now agreed to be somewhat more accommodating of requests for a certificate of residency of a Canadian partnership (e.g., from the India tax authorities), stating that where a representative is authorized to act on behalf of all the partners, CRA, on request of that representative:
will certify the residency of all the partners of the partnership, and certify that the partnership is a "Canadian partnership."
It would not hurt to add a clause, to the boilerplate for an LP agreement, that the GP or its tax advisor is thereby authorized to seek a certificate of residency on behalf of all the partners.
Neal Armstrong. Summary of 26 January 2015 T.I. 2014-0547501E5 under s. 2(1).
The Agnico choice of an issuance date FX translation date may be inconsistent with the Mosely v. Koffyfontein finding that the consideration paid for shares on a debenture conversion is to be determined at that conversion time
Agnico convertible debentures, which had been issued for U.S.$1,000 per debenture, were converted into common shares at a time that the U.S. dollar had depreciated in value, thereby in the view of CRA giving rise to a s. 39(2) FX gain. However, Woods J found that the relevant date for translating the amount paid by Agnico on settling the debentures should be viewed as the date when the "true consideration" for the shares (with which Agnico repaid the debentures) had been received, which she found was the date when the U.S.1,000 was received on the prior issuance of each debenture.
Chris Van Loan and Peter Lee suggest that Mosely v. Koffyfontein, [1904] 2 Ch. 108] (CA) arguably casts doubt on the correctness of Agnico given the finding there that the consideration paid for shares on the conversion of debentures usually is to be determined at the time the obligation to repay is extinguished, and not when the debentures are issued.
Neal Armstrong. Summary of Chris Van Loan and Peter Lee, "Agnico Eagle Mines Limited v. The Queen," International Tax, Wolters Kluwer CCH, No. 80, February 2015, p.1 under s. 261(2).
Income Tax Severed Letters 18 March 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Inbound debt into Canada generally should not be recharacterized as equity under the transfer-pricing rule given the annual application of the thin cap rule
CRA and the OECD acknowledge that recharacterizing a transaction under the transfer-pricing rules is an exceptional step which should only be taken in limited circumstances. On the other hand, a non-resident parent’s capitalization or recapitalization of it Canadian sub "is not something that could (ever) be undertaken by arm's-length parties," so that this un-exceptional transaction would seemingly lend itself to frequent recharacterization through treating loans to Canadian subs as equity.
The likely answer to this dilemma is that the cross-border interest is annually tested under the thin cap rule, so that there should be "little scope" for the recharacterization rule in s. 247(2)(d) to operate.
Neal Armstrong. Summary of Derek G. Alty and Brian M. Studniberg, "The Corporate Capital Structure: Thin Capitalization and the ‘Recharacterization’ Rules in Paragraphs 247(2)(b) and (d)," Canadian Tax Journal, (2014) 62:4, 1159-1202 under s. 247(2).
U.S. shareholders of Rio Alto cannot access a Treaty to exempt their sale of Rio Alto shares for Tahoe shares from Peruvian gains tax
Tahoe is proposing to acquire all the Rio Alto common shares under a Plan of Arrangement in exchange for Tahoe common shares (together with nominal cash so as to require a joint s. 85(1) election to achieve Canadian rollover treatment), with Tahoe then dropping its Rio Alto shares into a wholly-owned subsidiary and causing their amalgamation in a conventional amalgamation. The share exchange, drop-down and amalgamation are intended to qualify as a Code s. 368(a) reorganization – so that tax deferral (except re the nominal cash) generally will be available for U.S. shareholders who acquired their Rio Alto shares after May 2011, as Rio Alto is believed not to have been a PFIC since then.
Rio Alto’s assets are mostly Peruvian mining/development subsidiaries. As the U.S. does not have a Treaty with Peru, U.S. shareholders of Rio Alto (unlike Canadian-resident shareholders) will not be exempt from Peruvian tax arising on the exchange of their shares under the Peruvian equivalent of the taxable Canadian property/FIRPTA rules, and generally will not be entitled to a U.S. foreign tax credit, as any gain on their Rio Alto shares would be treated as U.S.-source income.
There is no discussion of how Peru might collect this tax.
Neal Armstrong. Summary of Rio Alto Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.