News of Note
Resource Capital – Australian Federal Court of Appeal finds that, in determining whether the principal asset of a mining company is resource property, substantial separate value should not be accorded to the (intangible) mining information
Email this ContentA year ago, the Australian Federal Court found that if a sale of shares by a non-resident vendor (RCF) of an Australian gold mining company had not been Treaty-exempt, the company should not be considered to have more than 50% of its assets as Australian real property (i.e., its mining rights), so that the gain also would not have been taxable under the Australian equivalent of the taxable Canadian property rules.
This had rested on a finding that one of the quite valuable non-real estate assets of the company was its "mining information." The logic was that if a purchaser acquired only the mining rights and not the drilling results and mining model, it would have to spend a huge sum on exploration in order to be able to commence production approximately four years later. Were this logic importable, it would suggest that many Canadian mining company shares may not be taxable Canadian property.
A three-judge panel in the Federal Court has now reversed this decision, stating that it was inappropriate to assume a sale of the mining rights separately from the mining information and that "in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information ... for less than [its] re-creation costs with little or no delay."
RCF was a Caymans LP with US-resident partners, which was treated for Australian purposes as a corporation and for US purposes as fiscally transparent. The Court (contrary to the primary judge below) found that "because RCF was neither a resident of the US nor a resident of Australia" it followed that the Australia-U.S. Treaty "does not apply to the gain in the hands of RCF" to limit Australia’s right to tax it.
Neal Armstrong. Summaries of Commissioner of Taxation v. Resource Capital Fund III LP, [2014] FCAFC 37 (Fed. Ct. of Austr.) under General Concepts – fair market value – other and Treaties – Art 4.
832866 - Tax Court of Canada finds that failure to ask GST questions about a self-supply is neglect
Under the GST self-supply rule, if a newly-constructed home held in inventory commences to be licensed or leased for personal use, GST is triggered on its fair market value. I am explaining this because it may not be well known.
A small company failed to recognize the application of this rule when its shareholders started to use such a house for personal use which it couldn’t sell. Rip CJ found that this constituted neglect which opened up an otherwise statute-barred reporting period: the novelty of this situation should have "disturbed" it sufficiently to ask a chartered accountant about the GST treatment.
Neal Armstrong. Summary of 832866 Ontario Inc. v. The Queen, 2014 TCC 93 (Informal Procedure) under ETA - s. 298(4).
Capital gains reserves cannot be claimed under reverse earnouts
CRA considers that no capital gains reserve can be claimed where shares are sold on a reverse earn-out, given that the proceeds of disposition are not certain at the moment of sale.
Neal Armstrong. Summary of 24 February 2014 T.I. 2013-0505391E5 F under s. 12(1)(g).
Income Tax Severed Letters 2 April 2014
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Caithkin – Tax Court of Canada accepts the GST/HST concept of a “re-supply” of a service.
Although someone might think that a service by its very nature can only be rendered and consumed and (in contrast to property) cannot be resupplied, that is not true. Graham J found that a company which placed children in foster homes for children’s aid societies and assisted the foster parents was making a "re-supply" to the societies of foster care services which it had "acquired" from the foster parents.
Neal Armstrong. Summaries of Caithkin Inc. v. The Queen, 2014 TCC 80 under ETA, s. 123(1) – supply and Sched V, Pt. IV, s. 2.
Congiu – Federal Court of Appeal confirms that “judicial comity” dictated following a Quebec decision dealing with the same facts
The taxpayer was assessed under the equivalent GST and QST provisions of ss. 159 and 160 for distributing property without a clearance certificate. The Quebec assessments were judicially reviewed first, and while this decision was under appeal by the taxpayer to the Quebec Court of Appeal, her federal appeal came before Angers J on the basis of an agreed statement of facts reflecting the findings in the Quebec action.
Angers J found that it would be an abuse of process to consider essentially the same dispute, as there was a need to maintain "coherence" in judicial dispositions of the same question. In the Federal Court of Appeal (whose task was eased by the intervening dismissal of the Quebec appeal) Blais JA stated that this application of "the principles of judicial comity was quite justified."
Neal Armstrong. Summary of Congiu v. The Queen, 2013 CCI 271, aff'd 2014 FCA 73 under General Concepts - Abuse of Process.
An improvident loan is a transfer of property
CRA indicated that a loan potentially may be a "transfer of property" for purposes of s. 56(2) "if, when the loan is made by a lender, it is apparent that the borrower will not be able to repay the loan."
Neal Armstrong. Summaries of 27 February 2014 T.I. 2013-0506401E5 under ss. 56(2) and 15(2).
Calloway is eliminating its 2-tier trust structure in order to convert for accounting reasons to a closed-end fund
Calloway REIT currently is an open-end mutual fund trust holding rental limited partnerships through a subsidiary trust ("Holdings Trust"). In connection with ensuring that exchangeable LP units held in the subsidiary LPs will not be treated as debt for accounting purposes, it will convert to a closed-end fund pursuant to a ruling it obtained on August 13, 2013. However, to so qualify, Calloway must get rid of Holdings Trust (see ss. 108(2)(b)(iii) and (iv), and perhaps (v)), which it intends to do in 2014. (Eliminating Holdings Trust also presumably would increase the rental gross REIT revenues which are allocated to Calloway.)
Accordingly, Holdings Trust will transfer its assets under s. 107.4 to a newly-formed subsidiary unit trust ("MFT") of Calloway, with 3% of MFT's units then being distributed to the Calloway unitholders in order to qualify MFT as a mutual fund trust. MFT then will be merged into Calloway under s. 132.2.
Neal Armstrong. Summary of Calloway REIT AIF for its 2013 year under Other – Subsidiary S. 132.2 Mergers – Subtrust Elimination.
CRA permits an eligible dividend to be allocated solely to the safe income portion of a larger dividend
A Canadian-controlled private corporation (Opco) with an ample general rate income pool is deemed to pay a significant deemed dividend to a CCPC shareholder (Holdco) when it redeems preferred shares. All but $75,000 of that deemed dividend in turn is deemed to be proceeds of disposition by s. 55(2) because that is the safe income on hand attributable to the redeemed shares. Opco designates only $75,000 of the deemed dividend as an eligible dividend, as that is the maximum possible addition to Holdco’s GRIP.
CRA considers that the full $75,000 is an addition to Holdco’s GRIP, i.e., it will not prorate the eligible dividend between the portion of the deemed dividend that is converted into proceeds of disposition in Holdco’s hands (and therefore is not eligible for a GRIP addition) and the safe income portion of the dividend (which is so eligible).
Neal Armstrong. Summary of 20 February 2014 T.I. 2013-0480051E5 F under s. 89(1) - General Rate Income Pool.
CRA really uses all that T1134/T1135 foreign reporting fodder
Whether CRA will apply the s. 162(5) penalty or the more significant 162(7) penalty when foreign reporting forms (e.g., T1134, T1135 or T1142) are incomplete depends on whether the form is merely "missing information which does not affect the substance of the form" or it instead "is substantially incomplete." Why the fuss?
[T]he required information provided by the forms is entered into the Foreign Reporting Requirements Management System (FRRMS) by the [Ottawa Technology Centre]. The… information from the FRRMS provides the main risk assessment tool for Aggressive Tax Planning and international auditors.
Neal Armstrong. Summary of 6 December 2013 Memo 2012-0458401I7 under s. 162(7).