News of Note
Most multi-national employee benefit plans with Canadian employees face intractable issues in applying the NRT rules
Email this ContentThe non-resident trust rules in s. 94 are at odds with the realities of global employer benefit plans. Among other issues:
- It may be unclear whether a (usually foreign law) plan is a trust or a custodial arrangement – or it might be both, such as a U.K. sharesave plan.
- The typical non-U.S. multinational EBP will not satisfy the requirement in para. (g) of the "exempt foreign trust" definition that it provide benefits primarily for services rendered in its country of residence – for example, a U.K. retirement plan which is established in Jersey, or a French "trust" where the French employees represent only 49% of the worldwide workforce.
- Respecting the s. 94(2)(k.1) rule deeming there to be a resident contribution when any person has made transfers for the benefit of an employee of a Canadian employer, it may be difficult to determine whether ad hoc contributions to the global EBP by the foreign parent are made in respect of any particular employee - for example, if the parent contributed in 2010, and the first award to an employee of a Canadian entity is made in 2013.
- Application of the exemption for "qualifying services" may require determining when services for a particular award are rendered – for example, if an employee who will become a "bad Canadian" under a 60-month rule is granted a new three-year vesting RSU, when are the services rendered to which this award relates?
- If the trust elects to limit its exposure to Canadian tax on the "resident portion" of the trust, looking at the ratio of the beneficial interests of the Canadian employees versus the others may not reflect the actual contributions which have gone into the trust – nor may it be appropriate to assume that vested beneficial interests are equal to interests with a substantial risk of forfeiture.
Neal Armstrong. Summaries of Peter Megoudis, "The Canadian Non-resident Trust Rules and Global Employee Benefit Plan Trusts," Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24, No. 3, October 2012 [sic], p. 1583 under s. 94(3), s. 94(1) – exempt trust – (g), s. 94(2)(k.1), s. 94(1) – exempt trust – (f), and s. 94(1) – resident portion.
Hafizy - Federal Court of Appeal observes that appellants must topple the tree rather than tearing off branches
In appeals of Tax Court decisions before the Federa Court of Appeal, the standard of review for conclusions of mixed fact and law is "palpable and overriding error" (see McGoldrick). Gauthier JA has repeated an admonition of Stratas JA that:
When arguing palpable and overriding error, it is not enough to pull at leaves and branches and leave the tree standing. The entire tree must fall.
Neal Armstrong. Summary of Hafizy v. The Queen, 2014 FCA 109 under s. 180(3).
John Doe - Supreme Court of Canada finds that internal Finance policy papers were exempt from Access-to-Information disclosure
Schwartz and Yip have suggested that, in light of the need to ascertain the policy choices underlying provisions in a GAAR analysis of their alleged misuse or abuse, "the taxpayer should be entitled to access information about the tax policy of the specific provisions" through an Access to Information request – and that an exclusion for government documents representing "advice or recommendations" should be construed narrowly.
Although they have a valid point, Rothstein J found that the Ontario Ministry of Finance was entitled to refuse to provide various internal drafts of a policy options paper under the "advice or recommendations" exclusion in the equivalent Ontario provision: the intended effect of the exclusion, which was to encourage public servants to provide candid and complete advice on policy options including, in this case, tax amendments, would be undercut by interpreting the exclusion narrowly. The same logic might apply to preliminary drafts of CRA positions.
Neal Armstrong. Summary of John Doe v. Ontario (Finance), 2014 SCC 36 under Access to Information Act, s. 21.
Gervais – Tax Court of Canada finds that a rollover followed by immediate resale at no commercial gain is an income account transaction
The taxpayer purchased 1.04M preferred shares from her husband at a cost of $1.04M and was gifted a further 1.04M shares on a rollover basis by him under s. 73, so that her cost was $0.04M. The idea was that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there would be a $0.5M capital gain attributed back to her husband on the gifted shares, and that the other $0.5M capital gain would be "hers," so that she could claim the capital gains exemption.
Jorré J accepted that the gifted shares were acquired on capital account (as a gifting transaction is not a trading transaction), and he also accepted that the transactions did not generate a commercial profit to the taxpayer, as the shares did not change in value between their acquisition by her and their sale. However, he found that as the purchased shares were acquired with a view to their immediate resale, they were acquired on income account. (This appears to be inconsistent with the proposition that a transaction which is not intended to give rise to a commercial profit is not a trading transaction - see Continental Bank, Loewen and 2012-0438651E5).
Accordingly, s. 47 did not apply - so that her full $1M gain on resale was a capital gain on the gifted shares, all of that capital gain was attributed to her husband, and it was not necessary to address GAAR.
Summaries of Gervais v. The Queen, 2014 CCI 119 under s. 9 - capital gain v. profit – shares, and s. 47(1).
Double income-inclusion resulted where stock options were issued directly to a corporate consultant’s shareholder
Where a corporate consultant ("Corporation") was entitled under "Publico’s" stock option plan to receive options, but Publico issued the options directly to Corporation’s individual shareholder, CRA found that the stock option benefit on exercise was includible in Corporation’s income under s. 56(4) (or, in the alternative, s. 56(2)) and also in the individual’s income as a shareholder benefit – unless she received the benefit qua employee in which case it would be included in her income under s. 6(1)(a), with a potential deduction to Corporation.
Neal Armstrong. Summaries of 11 March 2014 Memo 2013-0513221I7 F under s. 56(4), s. 56(2) and s. 15(1).
CRA rules that conversion of U.S.-dollar into Canadian-dollar debt occurs on a rollover basis
CRA has ruled (see also 2008-0300161R3) respecting the exchange (subsequent to the addition of an exchange right) of old non-interest bearing U.S.-dollar debt for new debt with a Canadian-dollar principal (presumably equal to the equivalent of the old debt’s U.S.-dollar principal at the time of the exchange). CRA considered that s. 51.1 (which requires that the new and old debt have the same principal amounts) accords rollover treatment to the creditor, and that s. 39(2) (or s. 80 – see s. 80(2)(k)) does not generate income to the debtor (see also 9532285). This is favourable, as more generally the principal amount of a U.S.-dollar obligation should be expressed in Canadian dollars based on the historical rather than current exchange rate - see Imperial Oil.
CRA also ruled on ATR-66-style "debt slide" transactions. CRA contemporaneously released an interpretation indicating that the "cancellation ... [of ATR-66] does not represent a change in the CRA's view as to whether the general anti-avoidance rule would apply to the transaction described therein."
Neal Armstrong. Summaries of 2014 Ruling 2013-0514191R3 under ss. 51.1 and 80.01(4) and summary of 4 April 2014 T.I. 2014-0522501E5 under s. 80.01(4).
CRA does not accommodate using attribution rules to split income from a professional corporation with the spouse
S. 74.5(11) denies the application of the attribution rules if it may reasonably be concluded that "one of the main reasons" for the relevant property transfer was to reduce tax on the income derived from the property.
A professional who was incorporating a professional practice would first jointly incorporate the corporation with his spouse, with his spouse then gifting her shares to him. After noting his submission that the sole reason for the gift of the shares from his spouse was a regulatory requirement that professional corporations be solely owned by professionals, CRA stated that it was possible that s. 74.5(11) would apply to deny attribution of dividend income on the gifted shares back to the spouse.
Neal Armstrong. Summary of 24 March 2014 T.I. 2014-0519661E5 under s. 74.5(11).
2253787 Ontario – Tax Court of Canada finds that a purchase on behalf of a grey marketer cannot be done on an agency basis
A grey marketer acquired Canadian iPhones for export to Hong Kong, which was a prohibited market. It was denied input tax credits for HST incurred by buyers (whom it reimbursed) in acquiring the phones for it from Canadian Apple stores. Bocock J managed to conclude that because its intended use of the phones was contrary to Apple’s sale terms, the grey marketer lacked the "legal capacity" to purchase the phones – so that the buyers could not be considered to have purchased the phones as its agents.
If the buyers were not agents, that meant that they bought the phones on their own account, also for illicit resale.
Neal Armstrong. Summary of 2253787 Ontario Inc. v. The Queen, 2014 TCC 121 under Input Tax Credit Information (GST/HST) Regulations, s. 3(c).
CRA finds that a foreign JV company is not a specified debtor of the indirect Canadian JV partner
A Luxembourg subsidiary (Finco) of a Canadian holding company (Canco2) will be lending money to Forco3 on a pro rata basis with the other unrelated shareholder (Forco2) of Forco3. The loans by the two Forco3 shareholders are in "equivalent" amounts, so that there may be an implication that their shareholdings in Forco3 are equal.
As Canco2 does not have a greater than 50% indirect interest in Forco3, Forco3 does not qualify as a CFA of Canco2 for purposes of the upstream loan rules. Accordingly, those rules will not apply to the loans made by Finco to Forco3 only if Forco3 deals at arm’s length with Canco2.
Essentially all the significant decisions respecting Forco3 are made by the two shareholders jointly, so that it might be argued that they are acting in concert and therefore do not deal at arm’s length with Forco3 (see Windsor Plastics [high-water mark of "acting-in-concert"], Petro-Canada cf. McMullen, Lanester). Nonetheless, CRA was willing to accept a representation that Forco3 dealt at arm’s length with Canco2, so that the upstream loan rules did not apply.
Neal Armstrong. Summary of 2014 Ruling 2013-0510551R3 under s. 90(15) – specified debtor.
Income Tax Severed Letters 7 May 2014
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.