News of Note

CRA considers that the GST manufacturer’s rebate rule is only available for rebates paid to a third party

Although on its face, ETA s. 181.1 could apply where a registered vendor refunds part of the selling price together with GST to a registered purchaser, CRA’s position is that s. 181.1 only "applies to rebates paid by a supplier to third parties with whom the supplier was not dealing directly."  The significance of this is that if the vendor does not issue (or receive) a credit note (or debit note) in the proper form for the adjustment, so that the vendor is not entitled to an input tax credit for the refunded GST under s. 232(3), the vendor also will not be entitled to claim an ITC under s. 181.1.  However, in this situation CRA considers that the purchaser nonetheless is required to remit the refunded GST on general principles even though there is no explicit addition to its net tax obligation under s. 232.

Neal Armstrong.  Summary of 8 July 2013 Interpretation 145134 under ETA s. 232(3).

CRA refuses to grandfather an existing trust from an adverse policy change without an indication of reliance on its earlier position

After having taken a more favourable position between 1988 and 1995, CRA then indicated that it considered the settlement of a revocable living trust to give rise to a new full-blown trust over all the contributed property.  CRA refused to give the taxpayers the benefit of its more favourable previous policy respecting a revocable living trust that had been settled prior to 1988, stating that "it cannot be said that at the time, the subject taxpayers relied on opinions we subsequently expressed between 1988 and 1995."  Consequently, the trust was subject to the 21-year deemed realization rule based on the year of settlement.

Neal Armstrong.  Summary of 14 February 2014 Memo 2013-0490891I7 under s. 104(4).

CRA may challenge alleged payments of dividends through book entries

In response to a suggestion that a dividend to a sole individual shareholder was paid through a journal entry recording an increase in a loan owing to the shareholder or a decrease in a loan made to her, CRA stated:

The necessary documentation must be provided in a particular instance to corroborate that factually and legally a dividend has been paid by the corporation and received by the shareholder.  In this regard, book entries are ancillary and serve only to report transactions [citing Hickman].

Sounds like a set-off agreement or written loan amendment would be a good idea.

Neal Armstrong.  Summary of 30 January 2014 T.I. 2013-0515761E5 F under s. 82(1).

Canadian multinationals have a 26 June 2014 deadline to rewrite the history of their CFA distributions

Canadian corporate taxpayers can elect by June 26, 2014 to apply Reg. 5901(2)(b) (and various other provisions) retroactively, thereby effectively according a choice as to whether post-December 20, 2002 foreign affiliate distributions reduced surplus or instead ground basis.  For example, this choice could resolve uncertainty where it was unclear whether an historic distribution was a capital or dividend distribution or inadvertently elevated taxable surplus.  The taxpayer might also elect for a distribution to come out of exempt surplus before that surplus was eroded by exempt losses.

Neal Armstrong.  Summaries of Geoffrey S. Turner, "June 2014 Election Deadlines for Retroactive Application of New Foreign Affiliate Reorganization Rules", CCH International Tax, No. 74, February 2014, p. 1 under Reg. 5901(2), s. 88(3.3), s. 95(2)(d.1) and s. 95(2)(e).

Descarries – Tax Court of Canada finds that using outside basis to step up outside PUC was contrary to s. 84.1's object

Some siblings would have realized a deemed dividend of $625,000 and a capital loss of $350,000 if they had wound-up a real estate company (Oka).  Instead, they:

  • did a dirty s. 85 exchange of their Oka shares for Oka shares with a stepped-up adjusted cost base
  • transferred those shares to a Newco for Newco shares with a stepped-up paid-up capital
  • redeemed most of their Newco shares (with cash derived from a previous loan from Oka to Newco), thereby realizing a capital loss to offset capital gain realized on the 1st step
  • following a sale of the real estate, wound-up Oka, then Newco

so that they realized a deemed dividend of only $275,000 (i.e., $625,000-$350,000) and no net capital gain (or loss).

Hogan J found that these transactions abused the object of s. 84.1 (a general anti-avoidance rule analysis which the Crown had not suggested).  The transactions were carefully designed to be well beyond the specific scope of ss. 84(2) and 84.1, but under the broader GAAR brush this didn’t matter.

Neal Armstrong.  Summaries of Descarries v. The Queen, 2014 DTC 1143 [at 3412], 2014 TCC 75 under ss. 84(2)245(4) and 171(1).

Income Tax Severed Letters 19 March 2014

This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Two-tier joint ventures are not accepted for GST/HST purposes

Where all the members of a real estate joint venture (JV-1) enter into a 50-50 joint venture (JV-2) with a seventh person respecting a further property, JV-1 and JV-2 will be treated as separate joint ventures, so that a decision to have a GST joint venture election in place for JV-2 and not JV-1 will be respected.  Furthermore, all participants in JV-2 will need to make the JV-2 joint venture election.

Neal Armstrong.  Summary of 12 July 2013 Interpretation 152393 under ETA - s. 273.

Intergeo (a Russian-controlled sub) is proposing a reverse takeover of Mercator (a CRIC) utilizing restricted board nominations rights and with puts being issued to the Mercator shareholders

Intergeo (a BVI subsidiary of Daselina, which is a BVI holding company of a Russian billionaire) which unsuccessfully attempted to go public two years ago, is now proposing effectively the same thing through a reverse (share-for-share exchange) takeover of TSX-listed Mercator, so that Daselina will own approximately 85% of the post-reorganization Mercator, which in turn will own Intergeo.  The current Mercator shareholders might demur at minority status in a Russian subsidiary.  Accordingly, they are to receive (under s. 86) a right to put their common shares to Mercator for $5 per share during an exercise window of 18 to 30 months following the arrangement's effective date, with $31.7M placed in escrow as security.

Mercator currently has paid-up capital of $400 million, so that even if the foreign affiliate dumping rules apply to Mercator’s investment in Intergeo (and to a Daselina-funded injection of working capital in existing foreign affiliates), Daselina, through PUC averaging, will end up holding common shares with full PUC.  However, the effect of Special Shares to be issued to each of Daselina and a BVI mystery company (Kirkland), is that Daselina and Kirkland will have the right to nominate only three of the nine Mercator board members (but with the other six being nominated by the board itself) – but they also will have veto rights on major decisions.  These shares might result in Daselina not controlling Mercator so as to insulate against application of the FAD rules.  See s. 212.3 - Example 1-E.

Appendix T of the Circular explains that "taxpayers and the Russian tax authorities often interpret tax laws differently."

Neal Armstrong.  Summary of Mercator Circular under Mergers & Acquisitions - Cross-Border Acquisitions - Inbound - Reverse takeovers.

CRA will not provide voluntary disclosure relief from interest if the taxpayer has been insufficiently naughty

In IC 00-1R3, CRA stipulates that "a [voluntary] disclosure must involve the application, or potential application of a penalty."  Esmail Bharwani asserts that "many accountants complain that CRA has decided in many of the cases that they would not have applied a gross negligence penalty, therefore the non-filer taxpayer would not qualify.  So what was supposed to have been a VD request with possible waived penalties and cancelled partial interest arrears has now become subject to regular filing, with penalties and interest."

Neal Armstrong.  Summary of Esmail Bharwani, "Voluntary Disclosures", CGA Magazine, March – April, 2014, p. 48 under s. 220(3.1).

Vine Estate – Tax Court of Canada finds that filing an amended return will not solve the statute-barring problem for the poorly-reviewed original return

Campbell J found that quickly filing an amended return, which corrects an error in a return which the taxpayer did not properly review, will not prevent CRA from reassessing the taxpayer after the normal reassessment period.  This issue arose because CRA did not process the correction until after that period had passed and failed to get a waiver for the particular error-related issue.

A practice point: this case suggests that if a client carefully reviews a return but does not spot anything odd that merits following-up with her "expert" accountant, the return will become statute barred in due course even if the error would have been obvious to a properly-briefed expert.  Therefore, insist that your client read it!

Neal Armstrong.  Summaries of Vine Estate v. The Queen, 2014 TCC 64 under s. 152(4)(a)(i) and General Concepts - Evidence and Fair Market Value - Land.

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