News of Note
George Weston Ltd. – Tax Court of Canada finds that a cross-currency swap was a hedge notwithstanding no intention to sell underlying indirect U.S. asset
Email this ContentAs a result of indirect U.S. acquisitions financed with Canadian-dollar debt, the creditworthiness (and stock price) of GWL (a Canadian public company) became susceptible to any substantial depreciation in the U.S. dollar. Accordingly, it entered into cross-currency swaps based on the total net value of its indirect U.S. investments at that time. Two years later, when its leverage was back down to a more comfortable level, it closed out its swaps at a gain of Cdn.$317 million.
This was a capital gain. Lamarre ACJ found:
- if, as here, "it is found that the derivative was used to hedge a capital investment, any gain derived from the derivative will be on capital account" (emphasis added); and
- the CRA position (see 2013-0481691E5, 2012-0465561I7 and 2011-0418541I7) requiring that a mooted hedge relate to a directly held asset (or liability) and "which denies capital treatment … if there is no sale or proposed sale of the underlying item being hedged … has no legal basis."
She also accepted evidence that cross-currency swaps, unlike futures and options, are unsuited to FX speculation due to their high initial transaction costs and lower liquidity, which may suggest that they presumptively are on capital account.
Neal Armstrong. Summaries of George Weston Ltd. v. The Queen, 2015 TCC 42, under s. 9 – capital gain v. profit – foreign exchange and General Concepts – Evidence.
CRA indicates that use of a new holding company can enable a related-person spin-off
If two related and one unrelated individual spin-off real estate held in their Opco to a newly-formed sister company (Realtyco) also equally owned by them, the s. 55(3)(a) safe harbor will not apply to the deemed dividends arising on the cross-redemptions occurring as part of the spin-off mechanics.
On the other hand, if they first transfer Opco into a new "Holdco," with essentially the same spin-off mechanics now occurring beneath the benevolent umbrella of Holdco, the s. 55(3)(a) exception will now be available, provided a few precautions are taken. This would still accomplish an objective of insulating the real estate from creditors of the Opco operations.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 16, 2014-0538031C6 F under s. 55(3)(a).
CRA applies its single property doctrine to tracking LP units
CRA’s position, that a partner holding different classes of partnership units has only one property for ITA purposes, obtains even where the units in question are tracking units which participate in the results of respective subsidiary LPs held by the top-tier partnership in which that partner is invested – so that it will have a single blended ACB for its units.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 22, 2014-0538161C6 under s. 53(1)(e)(i).
CRA accepts that real estate provided by a franchisor’s subsidiary qualified for s. 167 election purposes as provided “under” the agreement between franchisor and franchisee
Although CRA would not consider an ETA s. 167 election to be available when a franchisor sets up a new franchised restaurant unless the restaurant premises are transferred to the franchisee "under" the agreement for the supply of the franchise, CRA considers this requirement to be satisfied if the agreement provides that the site will be leased to the franchisee by a real estate subsidiary of the franchisor.
Neal Armstrong. Summary of 25 July 2014 Interpretation 158278 under ETA, s. 167.
Income Tax Severed Letters 18 February 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that an entity with no revenues can satisfy the REIT revenue tests
The 75% revenue test for REIT-qualification, or for qualification of a REIT's investment in a subsidiary as deemed real estate, requires that at least 75% of the gross REIT revenue of the REIT or subsidiary in the year in question be rents, mortgage interest or real property capital gains. CRA has effectively ruled that this test will be satisfied by a development subsidiary (or, in this case, a development LP held jointly with a developer) which does not have any revenues for the year (and similarly for the 90% revenue test for REIT qualification). This means that it is unnecessary to seed the development LP with "good" revenue, e.g., transferring a sliver interest in a rental LP to it, provided that it will not earn even a dollar of "bad" revenue in the year.
In this case, the interest of the REIT in the development LP was held by it indirectly through a wholly-owned rental property LP. CRA also ruled that the provision by the property LP of a guarantee of construction loans to the development partnership in consideration for annual guarantee fees did not represent the carrying on by the property LP of a business (so that the guarantee agreement viewed as a potentially valuable right to the fees did not represent non-portfolio property). Although this ruling likely was academic, it suggests that CRA may consider that it can be consistent with a mutual fund trust's maintaining of an investment undertaking to give a guarantee in support of one of its investments even where it charges guarantee fees.
Neal Armstrong. Summaries of 2014 Ruling 2014-0547491R3 under s. 122.1(1) – real estate investment trust, and s. 122.1(1) - security.
CRA applies the single supply doctrine to trump the recapture of provincial ITCs
Large businesses in Ontario have their Ontario input tax credit claims for various specified property or services, such as for most motor vehicles or related services (other than repair services), "recaptured" (i.e., denied). However, the single supply doctrine applies here as elsewhere. Accordingly, charges to a car company for the costs of loaner cars provided to dealership customers who were having their own cars serviced under warranty were considered to be part of the consideration for a single supply of repair services provided by the dealerships to the car company – so that the ITCs claimed by it for the Ontario HST on those charges were not recaptured.
Neal Armstrong. Summary of 6 June 2014 Ruling 143085 under New Harmonized Value-Added Tax System Regulations, No.2, s. 28(1)(d).
CRA finds that an employer generally is entitled to claim input tax credits for GST/HST charged to it by pension plan consultants
Although the concept of an on-sale of goods is obvious, that of an on-supply of services is more intractable. Nonetheless, there is a tendency to find a double supply where there is a double payment (unless agency is established).
For example, CRA considers that where a pension plan employer is charged for actuarial services but is entitled to be reimbursed out of the pension funds, the employer has received a supply of the actuarial services and is entitled to claim an input tax credit for the HST charged to it (assuming it is engaged in commercial activity) – but must collect HST on the reimbursement charge made to the pension plan. See also Caithkin.
Neal Armstrong. Summary of 26 June 2014 Ruling 157148 under ETA, s. 123(1) – recipient.
CRA notes GST/HST distinction between the supply of timber harvesting rights and of timber harvesting services
ETA, s. 162(2)(a) deems the supply of a right to exploit a forestry resource not to be a supply. However, CRA considers that "a person who merely agrees to cut down trees belonging to another is not the recipient of a supply of a right to exploit the resource; they are the supplier of a [taxable] service of cutting trees." Conversely, the recipient of a s. 162 right acquires title to the harvested trees at the moment of their felling rather than such title remaining with the other party.
Neal Armstrong. Summary of 6 June 2014 Interpretation 150533 under ETA, s. 162(2).
CRA requires rights of mutual control by members of a purported joint venture for it to qualify for the GST/HST joint venture election
CRA considers that in order for an arrangement to a qualify as joint venture, so that a joint venture election potentially can be made for GST/HST purposes, the participants must have "a right of mutual control," so that "essential strategic and major decisions such as disposition of assets and large expenditures normally require consent of all the participants." Accordingly, a purported joint venture for the generation of solar electricity on an owner’s roof and sharing of the resulting revenues would not qualify if all the building owner is doing is providing the roof and everything else is required to be handled only by the solar panel owner.
Summaries of 17 July 2014 Interpretation 152176 under ETA, s. 273(1) and Joint Venture (GST/HST) Regulations, s. 3(1)(e).