News of Note
New FAPI pick-up rule (similar to Code s. 951(a) rule) is on hold for reworking
Email this ContentProposed ss. 91(1.1) and (1.2) would now potentially require a FAPI pick-up where a CFA interest has been disposed of before year end, so that the FAPI pick-up generally will not now be avoided through not holding the CFA at that year end. The comparable U.S. rule is that pro rata portions of Subpart F income must be recognized unless the disposition occurs in the first 30 days of the CFC's taxable year and the sale is to a non-U.S. person.
This proposed rule was not included in the recently enacted Bill C-43 because it is being reworked by Finance.
Neal Armstrong. Summary of Nathan Boidman, "Canada Augments International Tax Rules", Tax Management International Journal, Vo. 43, No. 12, December 12, 2014, p. 759 under s. 91(1.1).
QROC elections (where available) should be considered for pre-acq dividends received by a partnership
Pre-acquisition surplus dividends received on foreign affiliate shares held by a partnership with Canadian corporate partners do not reduce the adjusted cost base to it of those shares. Instead, the consequences of the dividend are deferred until either those shares or the partnership interest are disposed of, with the result that the Canadian corporate partners realize a corresponding gain or increased proceeds of disposition at that time – even where such disposition otherwise would occur on a rollover basis.
This result can be avoided if any such distributions are made by the foreign affiliate as capital distributions to the partnership and are electively treated as qualifying returns of capital. However, this solution will not be available if capital distributions are not permitted or practicable in the particular foreign jurisdiction.
Neal Armstrong. Summary of Geoffrey S. Turner, "ACB Adjustments for Foreign Affiliate Shares Held Through Partnerships", International Tax (Wolters Kluwer CCH), No. 79, December 2014, p. 1 under s. 92(5).
Al-Hossain – Tax Court of Canada states that a declaration of trust cannot have a backdated effective date
Where two unrelated individuals purchase a new home jointly, each is required to satisfy the requirements for the new housing GST/HST rebate including that they each must occupy the home. Although Davidson adopted the dubious proposition that a non-occupying co-purchaser will scupper the rebate even if she is only a registered co-owner and is acquiring no beneficial interest, but this seems to have been implicitly rejected in Goyer.
Although her reasons are quite unclear on this point, Lyons J in Al-Hossain may have followed the Davidson rather than the Goyer approach. However, in any event, she went on to reject a submission that the non-occupying co-purchaser (who had signed the ownership and mortgage documents only to facilitate mortgage financing for his friend and appears to have been only an accommodation party) held his co-ownership interest only as bare trustee, as evidenced in a statutory declaration made less than three weeks after closing, stating:
The creation of a trust must be properly documented containing the requisite elements of a trust, dated, signed and in existence prior to or contemporaneous with the matter that is the subject of the trust arrangement.
She did not cite authority for this statement, which is inconsistent with judicial findings that property has been held on and after a date on trust or a resulting trust notwithstanding the lack of a contemporaneous trust deed or other document (Nelson, Bouchard).
Continued judicial statements like this might embolden CRA to resuscitate the position in the defunct IT-216 that it will not accept that a corporation holds real estate for its shareholder unless the declaration of trust was signed at the time of the property’s acquisition.
Neal Armstrong. Summaries of Al-Hossain v The Queen, 2014 TCC 379 under ETA s. 254(2) and General Concepts – Effective Date.
MBI Properties – High Court of Australia notes that, on general principles, an executory contract entails two supplies for GST purposes
The High Court of Australia observed that (under general principles):
[The] entering into and performing [of] an executory contract will in general involve the supplier making at least two supplies: a supply which occurs at the time of entering into the contract, in the form of both the creation of a contractual right to performance and the corresponding entering into of a contractual obligation to perform; and a supply which occurs at the time of contractual performance, even if contractual performance involves nothing more than the supplier observing a contractual obligation to refrain from taking some action….
This is a helpful backdrop for the rule in ETA s. 133, which assimilates all subsequently provided property or services under an agreement to the supply which occurs when the agreement is entered into (subject to exceptions, e.g., for leases under s. 136.1).
Neal Armstrong. Summaries of Commissioner of Taxation v MBI Properties Pty Ltd, [2014] HCA 49 under ETA s. 133 and s. 123(1) – supply.
CRA considers that an ITC generated to the transferor in a s. 85(1) drop-down of a building does not reduce the building UCC for s. 85 elected amount purposes
A registrant, such as a bank, acquires a building for $100, but for exempt use, so that its capital cost is $113 including non-creditable HST.
After the building has appreciated and CCA claims have reduced the undepreciated capital cost to $90, the building is transferred under s. 85(1) to a subsidiary. Because this is a taxable sale for HST purposes, the bank now is entitled to a $13 input tax credit. ITA s. 248(16) deems this ITC to be government assistance, so that for s. 85(1) purposes the building UCC is reduced from $90 to $77. Right?
CRA considers that because s. 85(1)(e) refers to the UCC of the building "immediately before" its disposition, whereas no entitlement to claim the ITC arises until the consideration for the drop-down becomes payable, the UCC for purposes of determining a permissible elected amount is $90, not $77. CRA appears to be effectively ignoring s. 248(16)(a)(i), which deems the ITC to have been received as government assistance when the $13 of HST originally was payable, because that does not make any sense under facts such as these.
Neal Armstrong. Summary of 27 November 2014 T.I. 2013-0503861E5 F under s. 85(1)(e).
568864 B.C. [Woodtone] – Tax Court of Canada decision confirms that a loan loss that is converted to an accrued terminal loss under s. 79.1(6) potentially can be deducted when realized
The taxpayer, a board producer, lent $3.5 million to a supplier secured by a security interest on patents held by the supplier's shareholder. On bankruptcy of the supplier and its shareholder, the trustee in bankruptcy assigned the beneficial (but not registered) ownership of the patents to the taxpayer, so that the taxpayer was deemed by s. 79.1(6) to have acquired them at a cost of $3.9 million (including legals) notwithstanding that their fair market value could have been much less.
Rip J found that the taxpayer realized a $3.9 million terminal loss two years later when it sold the beneficial interest in the patents to a related corporation for $1. Unsuccessful attempts to find a joint venture party to exploit the patents were sufficient corroboration that the patents had been acquired for an income-producing purpose. The effect was that the taxpayer deducted its loan loss on income account.
Neal Armstrong. Summaries of 568864 B.C. Ltd. v. The Queen, 2014 TCC 373 under s. 79.1(2) and Reg. 1102(1)(c).
Szymczyk – Tax Court of Canada finds that CRA is entitled to apply provisions with “latitude” rather than strictly
General Motors of Canada received an authorization from the Revenue Canada Collections Division in 1982 to use a simplified rule-of-thumb method for computing the employment benefit arising from the provision of new vehicles for personal and business use of management employees and its payment of the operating expenses. This helped address the difficulty of accounting for the benefits based on the large number of participating employees, the rapid turnover of vehicles (they got a replacement vehicle every 5,000 kilometers) and pooled business use of the vehicles (they could use each other’s vehicle).
Woods J found that the Minister was not estopped in reassessing the returns of the taxpayer (one of the employees) for 2008 and 2009 contrary to the 1982 authorization as the circumstances had materially changed (i.e., the 1993 enactment of s. 6(1)(k), and slower turnover of the vehicles). However, her reasons may imply that she would have accepted the taxpayer’s argument that "estoppel by convention" would have applied if there instead had been no material change in circumstances. This of course may imply that rulings are binding on CRA if the material facts are correctly stated and there is no change in law (see also Preston and MFK). Her comments also imply that the Cohen and Galway doctrine does not preclude the application by CRA of provisions of the Act using a rule-of-thumb approach, or otherwise applying them to complex or murky facts with "latitude."
Neal Armstrong. Summaries of Szymczyk v. The Queen, 2014 TCC 380 under General Concepts – Estoppel, s. 6(2), s. 6(1)(k), and General Concepts – Onus.
Income Tax Severed Letters 7 January 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kingspan uses asset sale by target (Vicwest) to fund all of the purchase price for Vicwest shares
A Canadian "Buyco" subsidiary of a UK parent (Kingspan) will effectively use the proceeds of sale of one of the businesses of its Canadian target (Vicwest) to fund its purchase of all the Vicwest shares. This will be accomplished by:
- Vicwest dropping such business under s. 85(1) into a Newco
- the prospective 3rd-party purchaser of the business (the Westeel Purchaser) lending essentially the full purchase price of that business to the Canadian Buyco for it to acquire all the Vicwest shares under the Plan of Arrangement for approx. $225M
- the shares of Newco being bumped under s. 88(1)(d) on the amalgamation of Buyco and Vicwest
- the Newco shares being transferred by Amalco to the 3rd party purchaser in repayment of the loan
The 11% shareholder of Vicwest has agreed not to acquire substituted property for the Newco shares (see s. 88(1)(c.3)) within one year of the Plan of Arrangement. Shareholders whose Vicwest shares are capital property "will" receive capital gains or loss treatment for their shares, i.e., the transaction will not be considered to be a surplus strip.
Neal Armstrong. Summary of Vicwest Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Asset sale funding purchase.
Failure to deduct income tax source deductions generally does not generate a liability for that tax
Where an employer has failed to withhold income tax source deductions from payroll of a resident employee, it is liable only for penalties and related interest and not for the income tax itself.
This CRA position appears clearly correct given that s. 227(8.4) specifically deems the employer to be liable for the undeducted income tax only where the employee was a non-resident.
Neal Armstrong. Summary of 6 November 2014 T.I. 2014-0530991E5 under s. 153(1).