News of Note
Debt forgiveness rules did not apply to forgiveness of a guarantee
Email this ContentCRA found that the debt forgiveness rules did not apply to the forgiveness of the obligations of an insolvent corporation (Canco) arising from its guarantee of the obligations of its non-resident subsidiary (Forco). This guarantee obligation was not a "commercial debt obligation" as it (i) was not for borrowed money and (ii) was not payable to acquire property for the purpose of producing income.
Respecting the second point, Canco apparently would not have acquired through subrogation the debt owing by Forco even if it had paid on its guarantee and, in any event, debt owing by an insolvent company might not have satisfied the income-producing purpose test in s. 20(1)(c)(ii) (see Cal-Gas, cf. Lewisport).
Neal Armstrong. Summary of 9 April 2014 Memo 2014-0519231I7 under s. 80(1) – commercial debt obligation.
An LLC manager with a carry holds two classes of shares, coopered-up Brent Kern schemes do not work, and s. 55(5)(f) designations are optional
Stephanie Dewey has summarized the first eight CRA responses at the 2014 STEP CRA Roundtable (with the other 10 still to come). Some highlights:
- Q. 3 Where a subsidiary LLC has a 3rd-party manager whose equity interest has a carry and an entitlement to a 2% "income allocation" amount, with all other distributions being split between Canco and the manager on a pro rata basis, in applying draft s. 93.3 CRA likely would consider that the manager has a special deemed class of shares to which the carry and quasi-fee interest are attached, and that there is a second ordinary deemed class which is held on a pro rata basis by Canco and the manager.
- Q. 5 CRA does not consider that a Brent Kern (or Pallen) style scheme to strip corporate surplus by exploiting the s. 75(2) attribution rule will work even if the Sommerer problem with the scheme is fixed.
- Q. 7 In light inter alia of Nassau Walnut, CRA’s practice is to only apply s. 55(2) to the excess of a dividend over safe income on hand, so that a s. 55(5)(f) designation appears to be optional.
Summaries of Stephanie Dewey, "2014 STEP Canada Roundtable – Part 1," Tax Topics (Wolters Kluwer CCH), No. 2208, July 3, 2014, pp. 1-6 under 2014 STEP Conference.
CRA finds that a non-resident airline with no Canadian PE is required to withhold from the remuneration of its non-resident employees unless a Reg. 102 waiver is obtained
The exemption under s. 81(1)(c) for income of a non-resident (here, a U.K. resident) from income earned in Canada from the operation of an aircraft in international traffic is available (assuming its home jurisdiction provides reciprocal relief) even if it is earning that income by lending out its aircraft and crew to a Canadian airline (so that it does not receive ticket revenues from the passengers.) Its U.K. employees generally would be Treaty-exempt on their remuneration (as they would not be present in Canada for more than 183 days in any 12-month period and their U.K. employer would not have a Canadian permanent establishment) - but according to CRA, this would not eliminate the requirement for Reg. 102 withholding from their remuneration unless a waiver is obtained.
This is starting to engage the Exida.com principle ("the obligation to file could only extend to those that had some connection with Canada,") and the presumption against extra-territoriality (Society of Composers).
Neal Armstrong. Summaries of 16 June 2014 T.I. 2013-0515431E5 under s. 81(1)(c), s. 115(3), Treaties – Art. 15, and Reg. 102.
CRA confirms its position that the lossco in a loss shift should have an independent source of income
CRA has quoted with approval its statement in Income Tax Technical News No. 30 dated May 21, 2004 that in a transaction to shift losses from a parent company to its subsidiary, the parent should have "other assets … that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary."
Neal Armstrong. Summary of 16 June 2014 T.I. 2013-0515431E5 under s. 111(1)(a).
CRA confirms that use of the Canada-Brazil Treaty FTC provisions is not limited by the federal s. 126 strictures (but also does not generate an Ontario FTC for tax spared amounts)
The Ontario Taxation Act incorporates by reference the foreign tax credit rules in the federal Act (i.e., s. 126) together with any other federal statutory (including Treaty) provisions which affect the application of those rules. However, a Canadian taxpayer who wishes to rely on the FTC provisions of the Canada-Brazil Treaty including a tax sparing provision (i.e., a provision that deems Brazilian withholding tax to have been levied even if it has not) applies those provisions independently of s. 126, so that it is not entitled to an Ontario FTC for the tax sparing amount.
Before so concluding, CRA noted in passing that where the Treaty FTC provisions are applied federally, "none of the provisions of section 126 of the Act, including subsections 126(4.1) and (4.2) can be applied to deny such a Federal FTC claim."
Neal Armstrong. Summaries of 16 June 2014 Memo 2014-0525961I7 under Taxation Act, s. 34(1) and Treaties - Art. 24.
A s. 90(2) distribution is made at the time of payment
Subject to exceptions, s. 90(2) deems a pro rata "distribution made" by a foreign affiliate to be a dividend. CRA considers that a distribution is not made until it is paid (including payment by note issued in satisfaction of the distribution), so that there is no distribution at the time of declaration of the distribution. This aligns deemed dividend recognition under s. 90(2), with that under s. 90(1) respecting the payment of what is a dividend under general corporate principles (see Banner Pharmacaps).
Neal Armstrong. Summaries of 17 June 2014 T.I. 2013-0506731E5 under s. 90(2) and s. 128.1(1).
The two types of PLOI elections operate differently for partnerships
A "PLOI" election can be made under s. 15(2.11) to avoid an income inclusion under s. 15(2) for a loan made made by a partnership between a CRIC (controlled by a non-resident corporation) and other Canadian corporates to a connected non-resident corporation. The election must be made by the filing due date for "the" CRIC. CRA considers that where more than one foreign controlled CRIC is a partner, this filing due date references the latest of the relevant filing-due dates of those CRICs.
On the other hand, such a partnership would be a look-through for purposes of the PLOI election which is available under the foreign-affiliate dumping rules for a loan made by the partnership to a subject corporation, so that the PLOI election would only be made by the subject corporation and the CRIC based on the CRIC’s proportionate share of the loan.
Neal Armstrong. Summaries of 18 June 2014 T.I. 2014-0534541I7 under s. 15(2.11) and s. 212.3(11).
CRA publishes its position on standard convertible debentures
CRA has published its statements at the 2013 annual CTF Conference that the interest coupons, and any premium realized, on "standard" convertible debentures are not participating interest.
Neal Armstrong. Summary of 26 November 2013 Annual CTF Roundtable, Q. 8, 2013-0509061C6 under s. 212(3) – participating interest.
Income Tax Severed Letters 2 July 2014
This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Graymar – Alberta Court of Queen’s Bench suggests that the Juliar rectification line of cases incorrectly imputes a tax avoidance purpose in transactions where specific tax consequences were not addressed at the time
Brown J found that transactions which were carried out for debt restructuring reasons could not be rectified to avoid a s. 15(2) inclusion, as this tax issue was not identified until later. He stated:
Juliar sits uneasily with Supreme Court’s direction in Performance Industries and Shafron that rectification is granted to restore a transaction to its original purpose, and not to avoid an unintended effect. While, therefore, rectification is available in order to avoid a tax disadvantage which the parties had originally transacted to avoid, it is not available to avoid an unintended tax disadvantage which the parties had not anticipated at the time of transacting.
Comments like this increase the odds that at some point the Supreme Court will review the correctness of the Juliar line of cases.
Neal Armstrong. Summary of Graymar Equipment (2008) Inc v Canada (Attorney General), 2014 ABQB 154 under General Concepts – Rectification.