News of Note
MacDonald – Tax Court of Canada case suggests that an operating corporation can have no de jure or de facto director
Email this ContentA shareholder of a corporation who had not been appointed as a director and who, unknowingly but in circumstances of extreme carelessness on his part, was named to third parties such as CRA and the corporate bank, as the corporation’s sole director, nonetheless was found not to be a de facto director of the corporation, so that he did not face personal liability for unremitted sources deductions and HST. Rossiter ACJ found that "the concept of de facto director ... should be limited to those who hold themselves out as directors," which did not advertently occur here.
This case indicates that it is possible for an operating corporation to have no director including a de facto director. However, the circumstances where this may have occurred in this case are unusual enough that there may not be broad policy concerns for CRA or Finance.
Neal Armstrong. Summary of MacDonald v. The Queen, 2014 TCC 308 under 227.1(1).
International Hi-Tech – Tax Court of Canada finds that secured creditors of a bankrupt corporation could launch a GST appeal in the name of the corporation
S. 266 of the ETA indicates that a receiver for a secured creditor who has taken control of a debtor’s property under its security interest "shall be deemed to be an agent of the [debtor] and any supply made or received and any act performed by the receiver in respect of [such]… assets… shall be deemed to have been made , received or performed...as agent on behalf of the [debtor]." Bocock J found that, after the receiver for the shareholder (and affiliates) of a bankrupt corporation acquired essentially all its assets out of the bankrupt estate pursuant to their security interest, it could bring an appeal in the name of the corporation to recover denied input tax credit claims, notwithstanding that the trustee in bankruptcy had not authorized such proceeding.
Although startling, this result is not literally inconsistent with the bolded words, i.e., there is nothing stating that the receiver’s agency is restricted to making or receiving supplies on the debtor’s behalf.
He implicitly treated the ITC entitlement as having been assigned to the receiver without discussing the prohibition in the s. 67 of the Financial Administration Act against the assignment of Crown debts. However, this point does not undercut the above branch of his decision and in fact reinforces the approach taken of bringing an action in the name of the corporation to get the cash.
Neal Armstrong. Summary of International Hi-Tech Industries v. The Queen, 2014 TCC 198 under ETA, s. 266(2)(a).
Deemed-resident trusts are exempt from Part XIII tax but subject to Part XIII withholding
Although s. 94(3)(a)(viii) deems various non-resident trusts to be resident in Canada for purposes of determining their liability for Part I and XIII tax (i.e., so that they are not subject to Part XIII tax), s. 94(4)(c) provides that they continue to be non-resident for s. 215 purposes so that, for example, a deemed dividend received by such a trust from a Canadian corporation would be subject to Part XIII withholding. The trust should treat such withholding as a payment on account of its Part I tax liability.
Neal Armstrong. Summaries of 25 July 2014 Memo 2013-0513641I7 under s. 94(3)(g) and s. 104(7.01).
Brent Kern – Federal Court of Appeal rejects submission that Sommerer was “manifestly wrong”
The Federal Court of Appeal has affirmed Brent Kern. A family trust received a surplus-stripping dividend which it sought to treat as being eligible in its hands for the intercorporate dividend deduction because the transactions had been engineered to have that dividend attributed to a family corporation. However, Sommerer was decided before judgment – so that Bocock J found that s. 75(2) did not apply to the dividend received by the trust as the related shares had been sold rather than contributed to it, i.e., the engineering did not work.
In the Federal Court of Appeal the trust was unsuccessful with an argument that Sommerer was "manifestly wrong."
As noted by CRA at the 2014 STEP Roundtable, there are variants of the scheme which are not caught by Sommerer but for which CRA considers that there is "a strong GAAR argument" for challenge – so that this may not be the end of the saga.
Neal Armstrong. Summary of Brent Kern Family Trust v. The Queen, 2013 DTC 1249, 2013 TCC 327, aff'd 2014 FCA 230 under s. 75(2).
CRA rules on further cross-border technique for avoiding Canadian withholding (or U.S. tax) on internal leveraging of a subsidiary Canadian business
CRA has now ruled on a 4th technique for a U.S. group to shelter Canadian business income with internal leverage while avoiding U.S. tax on interest income. (For three others, see Cardarelli/Keenan.)
US Parent Co carries on a Canadian active business through a (virtually) wholly-owned Canadian LP which has elected to be a corporation for Code purposes. It will transfer its LP units to a wholly-owned U.S. sub (US Sub) for an interest-bearing promissory note and shares of US Sub.
CRA ruled that the interest on the note (which domestically would be sourced to Canada under s. 212(13.2)) will be Treaty-exempt. Presumably, US Sub will be able to deduct that interest for Canadian purposes subject to the thin cap rules (and not be subject to current U.S. tax on the LP’s earnings), whereas the interest will not be subject to U.S. tax in the hands of US Parent Co as it and US Sub will file a U.S. consolidated return.
Neal Armstrong. Summary of 2014 Ruling 2014-0521831R3 under Treaties, Art. 11.
CRA recognizes non-application of s. 75(2) to LP business income allocated to a trust
Where a trust in which the settlor has a reversionary interest holds an LP, s. 75(2) will attribute to her the trust’s share of property income but not business income of the trust. See also 2013-0508841I7 F.
Neal Armstrong. Summary of 3 October 2014 T.I. 2013-0476871E5 under s. 75(2).
CRA will apply s. 15(2) only to the original loan where it was repaid and relent
Notwithstanding a gap in the wording of s. 15(2.11), CRA considers that where a pre-March 29, 2012 loan is repaid and the same amount is relent as part of the series of transactions that included that repayment, the new loan does not qualify for a "PLOI" election under s. 15(2.11) (see also 2013-0482991E5). However, by the same token, there will be no imputation of interest under s. 17.1 on the new loan, and (to avoid double taxation) s. 15(2) (and thus Part XIII withholding in the case of a non-resident creditor) will only apply to the old loan and not the new loan.
Neal Armstrong. Summary of 2 October 2014 T.I. 2013-0506551E5 under s. 15(2.11).
Income Tax Severed Letters 29 October 2014
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Belcourt Properties – Tax Court of Canada finds that the taxpayer achieved capital gains treatment on the prompt sale of the commercial-use portion of its condo development
A taxpayer which is a real estate developer may be able to establish that a particular property was acquired as a rental-income investment rather than inventory (see Leasehold Construction and Toolsie).
Here the taxpayer was able to achieve capital account treatment on the sale of the first floor rental portion of properties which otherwise had been developed by it as condo developments notwithstanding that the sale thereof occurred shortly after completion of the condo sales.
Neal Armstrong. Summary of Belcourt Properties Inc. v. The Queen, 2014 DTC 1182 [at 3678], 2014 TCC 208 under s. 9 – Capital gain v. profit – real estate.
Finance narrows the scope of the back-to-back loan rules
The proposed back-to-back loan rule would impose withholding tax where a Canadian borrower (say, "Canco") pays loan interest to an arm’s length "intermediary" if there is an "intermediary debt" with specified attributes owing, in turn, by the intermediary to a person who does not deal at arm’s length with Canco. There are cognate changes to the thin cap rules. The scope of an intermediary debt has been narrowed in the 20 October 2014 version of the draft legislation from the 29 August 2014 version:
- A strong causal connection now is required (through use of a "because" linkage (see Hoefele, Williams), except in the obvious case of limited recourse intermediary debt) between the intermediary debt and the Canco debt
- Reference is made to the Canco debt having become owing to the intermediary "because" of a security interest or other "specified right" of the intermediary, which again is more stringent than the August 29 version
- Furthermore, the holder of security may now pledge the secured property to secure the repayment of other debts which are part of the same package – and default does not result in a specified right provided that the intermediary must use any sale proceeds from the secured property to repay the Canco debt (or the related debts)
However, a safe harbour, for situations where intermediary debts represent less than 25% of qualifying categories of loans owing by and related secured property of Canco, remains quite narrow.
Neal Armstrong. Summaries of Steve Suarez, "Canada Releases Revised Back-to-Back Loan Rules," Tax Notes International, October 27, 2014, p. 357 under s. 212(3.1)(c) and s. 18(6)(d).