News of Note
CRA accepts that public trading in the shares of a dividend recipient is not part of the same series
Email this ContentIn connection with a group reorganization to consolidate income and deductions, Pubco will acquire a royalty interest from a general partnership (Partnership D) which is mostly owned by it and a wholly-owned subsidiary (Subco), with Pubco’s cumulative Canadian development expense account being boosted by the fair market value of the royalty, and with the fair market value proceeds proportionately reducing the CCDE of the partners (mostly it and Subco).
In connection with a subsequent transfer of Subco’s partnership interest in Partnership D to it, it will receive a deemed dividend from Subco. CRA ruled that the exclusion in s. 55(3)(a)(iv) would not apply to taint this deemed dividend notwithstanding that trading will occur in the shares of Pubco (viewed as the dividend recipient), and employees may exercise options. This may reflect the (appropriate) view that irrelevant transactions are not part of the same series. This ruling is more robust than 2013-0501811R3, where representations were given that (to management’s knowledge) the Pubco shareholders did not know about the loss consolidation transactions.
In what hopefully is a trite point, CRA also ruled that s. 97(2) applied to a contribution of property to a partnership (i.e., no equity consideration was given by the partnership).
A s. 88(1) ruling was given respecting the winding-up of a wholly–owned subsidiary without any apparent fussing about articles of dissolution not being filed for XX months.
Neal Armstrong. Summaries of 2014 Ruling 2013-0505431R3 under s. 55(3)(a), s. 66.2(5) – Canadian development expense – (e), s. 97(2) and s. 88(1).
CRA cannot assess statute-barred additional income following a notice of objection
Although s. 165(5) on its face states that the statute-barring rule does not apply to a reassessment made in response to an objection, Hogan J applied Anchor Pointe to find that s. 165(5) cannot be used to add income in a reassessment made beyond the normal reassessment period.
Dual findings - that a transfer of equipment, which the taxpayer previously had been licensing to his corporation free of charge, to the corporation was on capital account, yet was made in the course of commercial activity for GST purposes – may be reconcilable.
Neal Armstrong. Summaries of Klemen v. The Queen, 2014 TCC 244 under s. 165(5), s. 9 – capital gain v. profit – equipment, ETA – s. 123(1) – commercial activity.
The DFA rules might apply to currency forward hedges
Observations of Miller and Milet on the derivative forward agreement (DFA) and synthetic disposition arrangement (SDA) rules include:
- It is unclear whether the safe harbour from the DFA rules (contained in the Explanatory Notes) for an exchangeable share rests on the price of the share corresponding to its inherent value, or on the embedded exchange right not constituting an agreement. (The first rationale is more readily portable to other types of exchangeable securities.)
- Gains on currency forwards to hedge a capital asset or obligation might be deemed by the DFA rules to be on income account, given that their performance depends partly on an implicit interest rate differential.
- The SDA rule is very similar to an early version of the U.S. constructive sale rule, which was not implemented following criticism.
- The safe harbour under the SDA rules for arrangements that do not last at least a year means that at the time of filing its return a taxpayer may not know whether an arrangement is an SDA.
- Both the DFA and SDA arrangements can apply to the same arrangement, e.g., a forward sale of shares eliminating risk (to engage the SDA rules) and containing an embedded interest rate (to which the DFA rules apply).
Neal Armstrong. Summaries of Edward Miller and Matias Milet, "Derivative Forward Agreements and Synthetic Disposition Arrangements," 2013 Conference Report, (Canadian Tax Foundation), pp. 10:1-50 under s. 248(1) - derivative forward agreement, s. 248(1) - synthetic disposition arrangement, s. 80.6(2)(e), s. 112(9) and s. 126(4.5).
CRA considers that the application of s. 55(2) to cross-share redemptions by connected CCPCs gives rise to a Part IV tax circularity problem
If two connected Canadian-controlled private corporations cross-redeem shareholdings in each other with the resulting deemed dividends being subject to capital gains tax under s. 55(2), CRA considers that a circularity problem will arise: the capital gains tax on the deemed dividend received by each corporation will result in an addition to its refundable dividend tax on hand account, which will result in a dividend refund on the deemed dividend paid by it to the other corporation, which will result in Part IV tax to the other corporation, which will result in an addition to that corporation's RDTHOH account, which will generate a dividend refund to it and Part IV tax to the first corporation, and so on.
Furthermore, circularity is a sword and not a shield. In light of 943963, the exclusion from Part I tax under s. 55(2) for dividends subject to Part IV tax applies only to "normal" Part IV tax and not Part IV tax arising from the application of s. 55(2).
Neal Armstrong. Summary of 27 June 2014 T.I. 2013-0498191E5 F under s. 55(2).
CRA confirms that taxpayers may use a specific identification method for purposes of the s. 40(3.4) suspended-loss rule
CRA considers that, for purposes of applying the 30-day loss suspension rule in s. 40(3.4), the taxpayer can designate the order in which identical shares were disposed of by it (2003-0002915 F) and that where the loss suspension rule applies, the taxpayer nonetheless can recognize a pro rata loss if there is a reduction in the number of the shares held by it (or an affiliated person) at the end of the 30-day period (2001-008815). CRA has now published an example showing the combined operation of these two administrative positions.
Neal Armstrong. Summary of 2 July 2014 T.I. 2014-0529731E5 F under s. 40(3.4).
Taiga v. Deloitte – BC Supreme Court finds that a contingent tax-savings-based fee agreement with a company’s external auditors did not engage a conflict of interest
The entering into by a company (Taiga) of a contingent fee arrangement with its external auditors (Deloitte) whereby Deloitte would be paid 20% of the tax savings from implementing an Inter-Leasing-style plan to minimize provincial income tax did not give rise to a conflict of interest.
Affleck J also found that an obligation of Deloitte to repay the fees in the event of a "successful challenge" was not triggered on the initial CRA GAAR reassessments, but instead would only be triggered if they were "either unsuccessfully resisted in the courts or...the plaintiffs were professionally advised there was no reasonable prospect of successful resistance in the courts." As the tax dispute instead was settled in "a prudent settlement agreement preserving at least some of the benefits of the … Plan," Deloitte got to keep its fees.
Summary of Taiga Building Products Ltd. v. Deloitte & Touche, LLP, 2014 DTC 5082 [at 7068], 2014 BCSC 1083 under General Concepts – Negligence and Fiduciary Duty.
CRA confirms that a local s. 216 agent can reduce withholding on rent remittances for interest expenses paid directly by the non-resident
CRA has clarified that some statements in Guide T4144 - respecting remittances of Part XIII withholding on rent collections where a s. 216(4) undertaking of the non-resident has been given - mean that once CRA has approved the NR6, it will allow the local agent to withhold and remit based on the non-resident's net rental income after deduction not only of expenses paid by the agent but also of allowable expenses (e.g., interest respecting the property’s financing) paid directly by the non-resident.
Neal Armstrong. Summary of 22 July 2014 T.I. 2014-0520701E5 under s. 216(4).
Income Tax Severed Letters 13 August 2014
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hillis v. AG (Cda) – Constitutionality of the Canadian FATCA legislation is challenged
Ginny Hillis, who was born in the U.S. to Canadian-citizen parents and came to Canada when she was five, has launched an action (through Farris, Vaughan) to have the Canadian FATCA legislation declared void as unconstitutional on any one of five alternative grounds. The ground which might have the most legs is that the provision of the stipulated accountholder information about her and other US persons by Canadian financial institutions to the IRS (via CRA) occurs without any judicial authorization or notice to her or opportunity for her to be heard, and therefore violates her reasonable expectations of privacy contrary to her Charter right to be secure against unreasonable search or seizure. See Clayton, Kloster, Norwood and Gernhart.
A potential weak link in an argument that the FATCA legislation is also void for discriminating against residents of Canada who are US Persons is the potential need (see Fannon) to establish that "US Persons living in Canada are subject to prejudicial stereotypes and treatment in Canada and the United States."
Neal Armstrong. Summary of Statement of Claim of Hillis against the Attorney General of Canada under Charter – s. 8.
CRA has been reinvigorated in alleging “sham”
A book was recently published discussing the sham doctrine in the English-speaking world, with a focus on tax. In the chapter written by Loutzenhiser on the Canadian cases, he suggests that Stubart and Faraggi indicate that a "sham" can be created by a taxpayer unilaterally, i.e., without a common intention with another to deceive, and then states that Antle:
appears to be intended to 'lower the bar' and make it easier for a court to find a sham exists, possibly by signalling to judges that they should not be unduly troubled about the level of proof required to establish the necessary deceit. In fact, there is some anecdotal evidence that the CRA has begun to issue more assessments alleging sham since Antle.
Neal Armstrong. Summary of Glen Loutzenhiser, "Sham in the Canadian Courts," Sham Transactions (Edwin Simpson and Miranda Stewart, editors), Oxford University Press, 2014 under General Concepts - Sham.