News of Note
CRA considered that a negative ACB deemed gain from shares situated in Japan had a Canadian source for FTC purposes (i.e., no FTC)
Email this ContentCanco paid Japanese income tax on the capital gain reported on the distribution by it of its shares of a Japanese subsidiary ("Forco") to its non-resident parent as a dividend-in-kind, and claimed a foreign tax credit against the Canadian income tax payable on the taxable portion of the s. 40(3) gain realized as a result of a dividend distribution from Forco earlier in the year. Canco took the position that the s. 40(3) gain had a Japanese source because that was the location of the shares and Forco. However, CRA indicated that "a taxable capital gain resulting from a deemed disposition of property is considered to be Canadian-source income, which therefore cannot be included in the foreign non-business income for purposes of claiming a FTC." Moreover, Article 21 of the Treaty did not apply to re-source the s. 40(3) deemed gain to Japan because it was not taxed in Japan.
A further difficulty was that the gain on the distribution was subsequently determined to be nil (as the shares had a nil value) – yet Canco did not apply for a refund of the Japanese capital gains tax and instead claimed the FTC as described above. Not surprisingly, CRA applied Meyer to state that "the tax paid to the Japanese tax authorities was voluntary and as such, should not be considered to be a ‘tax’."
Neal Armstrong. Summaries of 23 July 2014 Memo 2014-0525231I7 under s. 126(1) and Treaties- Art. 24.
Income Tax Severed Letters 28 January 2015
This morning's release of 25 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Solutions Mindready R&D – Tax Court of Canada finds that decisive influence at the management level is sufficient to establish de facto control
Similarly to Lyrtech, Favreau J found that a supposed Canadian-controlled private corporation which carried on R&D for and at the direction of a public company and whose shares were held by a trust whose two trustees were key directors of the public company and whose beneficiaries were group companies, was controlled de facto by the public company. He stated that "a decisive economic role permitting a corporation to be in a position to impose its will on the management of the affairs of another corporation is sufficient to constitute control in fact."
Neal Armstrong. Summary of Solutions Mindready R&D Inc. v. The Queen, 2015 CCI 17 under s. 256(5.1).
U.S. tax prohibition against secured guarantees of Canadian sub can scupper the de minimis safe harbour under the back-to-back loan rules
A "de minimis" rule provides a potential safe harbour from application of the back-to-back loan rules respecting situations where the debt owing by Canco to the intermediary is one of a number of debts owing by a group of related debtors to the same creditor, and the same assets which secure the Canco debt also secure the other debts owing by those group members. This safe harbour would not be available, for example, where there are secured loans to both a U.S. parent and its Canadian subsidiary and, for U.S. tax reasons, the Canadian assets are provided as security only for the Canadian obligation and not for the U.S. obligation.
Neal Armstrong. Summary of Edward A. Heakes, "The Proposed Revisions to Back-to-Back Loan Rules," International Tax Planning (Federated Press), Vol. XIX, No. 4, 2014, p. 1357 under s. 212(3.1)(e).
S. 40(2)(e.1) should have paramountcy over s. 40(2)(g)(ii)
If there is an intra-group transfer of a non-interest-bearing debt, there generally will be a preference for a resulting loss to be denied by s. 40(2)(e.1) (intra-group transfer) rather than s. 40(2)(g)(ii) (no income-producing purpose), because the denied loss can then be added back to the adjusted cost base of the debt under s. 53(1)(f.1) or (f.11). It is appropriate to consider that s. 40(2)(e.1) has paramountcy because "presumably, Parliament did not intend the debt parking rules to apply as a result of capital losses realized within the related group," and the ACB add-back protects against the application of those rules.
Although CRA has ruled on occasion that s. 40(2)(e.1) rather than s. 40(2))(g)(ii) applied, it is not clear that these are paramountcy rulings as the non-interest-bearing debt in question may have been considered to have been acquired for an income producing purpose (e.g., a loan from a shareholder).
Neal Armstrong. Summary of Mike J. Hegedus, "Paragraph 40(2)(e.1) Versus Subparagraph 40(2)(g)(ii): Potential Conflict?" Resource Sector Taxation, Vol. IX, No. 4, 2014, p.684 under s. 40(2)(e.1).
CRA sort-of clarifies when tax dispute resolution fees become deductible
S. 60(o) provides a deduction for professional fees incurred in "preparing," instituting or prosecuting an objection or appeal "in relation to" an income tax assessment. CRA states that generally "a taxpayer can deduct professional fees from the moment when he or she is informed by the CRA that his or her income or tax for a taxation year will be revised," which suggests that CRA does not consider that costs dealing with a 30-day letter would generally be deductible under s. 60(o).
As for the deductibility under general (ss. 9 and 18(1)(a)) principles of professional fees incurred in connection with a voluntary disclosure, CRA states that "professional fees incurred in this context are not intended to produce income, because the VD instead permits a taxpayer to correct omissions made in the context of dealings with the CRA. Consequently, the deduction of the professional fees incurred in this context is restricted by paragraph 18(1)(a). However… expenses of preparing the tax returns, could be deductible."
This is questionable. The taxpayer in the Egg Marketing case (65302) did not pay its fine for an income-producing purpose, but the fine nonetheless was deductible because the conduct which triggered the fine was business-oriented. Similarly, the belated reporting of business income arises as a result of the process of having generated that income in the first place.
Neal Armstrong. Summaries of 17 October 2014 T.I. 2014-0532121E5 F under s. 60(o) and s. 18(1)(a) – legal fees.
CRA rules that a corporation can issue DSUs which indirectly track units through the use of tracking shares
The safe harbor in Reg. 6801(d) for deferred share unit plans is restricted to DSUs issued by a corporate employer or related corporation which are based on the fair market value of shares of a corporation in the group.
Employees of a public corporation managed a publicly listed LP of which a corporate subsidiary was the GP. CRA ruled that the corporation could get around the share restriction by having a Newco subsidiary issue a few tracking shares (i.e., shares which were redeemable and retractable for the trading price of the LP units) and then issuing DSUs to the managing employees which, in turn, tracked the tracking shares.
Neal Armstrong. Summary of 2014 Ruling 2012-0457101R3 under Reg. 6801(d).
Kaleidescape – Ontario Superior Court of Justice finds that a USA did not affect de jure control of a mooted CCPC
In order to try to qualify a Canadian corporation ("K-Can’), which economically was a subsidiary of a U.S. corporation ("K-US"), as a Canadian-controlled private corporation, 100 special voting shares were issued to an employee trust whose settlor was K-Can and whose trustee was Computershare. The Deed of Trust contemplated that Computershare would take its direction, in voting its shares, from the CEO of K-Can, who was a U.S. resident. In response to a CRA position that this established non-resident de jure control of K-Can, K-Can persuaded Carole Brown J to grant a rectification order to "clarify" that this clause was really referring to the settlor (i.e., K-Can) giving voting directions to Computershare.
She rejected a Crown argument that this rectification would do nothing to detract from the de jure control of K-Can by K-US in light inter alia of a unanimous shareholder agreement delegating all the powers of the board to the shareholders (of which only K-US was prepared to make decisions), stating that "the decision-making body is the Board of Directors" (cf. Jaft: "rescission, if granted, would serve to alter the essence of the litigation before the TCC;" and Bagtech: "one must consider ... any specific or unique limitation on… the board's power to manage the business and affairs of the company, as manifested in…any unanimous shareholder agreement." )
Most or all of the Juliar-style rectifications have involved retroactively replacing a bad tax plan with a better plan in order to give effect to an explicit or obvious continuous objective of avoiding a specific bad tax result. This case is different. K-Can got a provincial Supreme Court to rectify the wording of one clause in one of its documents, in order to weaken a CRA argument respecting an aggressive structure, but with no predictable effect on the ultimate resolution of the dispute.
Neal Armstrong. Summary of Kaleidescape Inc. v. MNR, 2014 ONSC 4983 under General Concepts - Rectification and Rescission.
Inventory potentially can be bumped on a partnership winding-up
Unlike s. 98(3), which requires that property to be bumped on the conversion of a partnership into a co-ownership must be non-depreciable capital property of the partnership, s. 98(5) requires that the bumped property be non-depreciable capital property of the "proprietor" (i.e., the former partner distributee).
This suggests that partnership inventory potentially can be bumped on a s. 98(5) partnership winding-up, e.g., real estate inventory that is received by the proprietor for development as a rental property. However, a fly in the ointment is that s. 98(5) requires that the proprietor continue with the partnership business and the use the distributed property therein. In addition to the factual question of whether there is a new business, this potentially engages a minority dictum in Qualico suggesting that unsold inventory of the partnership was not "used" in its business.
If in fact this "use" issue is a problem, no s. 98(5) rollover would be available for a partnership holding any inventory.
Neal Armstrong. Summary of Perry Truster, "Windup-Bump Comparison: Subsections 98(3) and (5)," Tax for the Owner-Manager (Canadian Tax Foundation), Vol. 15, No. 1, January 2015, p. 8 under s. 98(5).
Murphy Estate – Tax Court of Canada recognizes that a disclaimer has retroactive effect
An estate unsuccessfully argued that the effect of the settlement of some estate litigation pursuant to a consent order, which provided for the transfer of RRSP funds to the deceased’s surviving spouse, was to retroactively access the rollover for RRSP refund of premiums paid to a surviving spouse's RRSP. Among other problems, the consent order provided that the children (who otherwise would have been the RRSP beneficiaries) would transfer their interests in the RRSP to the surviving spouse which, of course, indicated that those interests were considered to have been accepted by them in the first instance rather than having been disclaimed. Accordingly, the RRSP proceeds were fully taxable in the deceased’s terminal return.
However, V. Miller J noted that the effect of a disclaimer "is to void the gift as if the disclaiming party never received it," which may imply that with better structuring a better result could have been achieved.
Neal Armstrong. Summary of Murphy Estate v. The Queen, 2015 TCC 8 under s. 146(8.8).