News of Note
CRA ruling requires that a mortgage investment corporation, which is carrying on bad activities through a subsidiary LP, not own or direct the LP's general partner
Email this ContentOne of the requirements for a corporation to qualify as a mortgage investment corporation is that "its only undertaking was the investing of funds...and it did not manage or develop any real…property." CRA has ruled that it is acceptable for a MIC to transfer a property (which it previously acquired on a mortgage foreclosure) to a newly-formed LP in consideration for LP units (presumably representing 99% or more of the LP equity), with the LP then developing the property – provided that limited liability for the MIC will be maintained as required by s. 253.1.
Consistently with CRA's policy views (2011-0415641E5), the LP would be prohibited from investing in foreign assets.
An oddity: the letter stipulates that "Mr. B," who is a relative of a significant MIC shareholder who has managerial control of it, will at all times be the sole shareholder, director and officer of the general partner of the LP. Someone apparently thought that it would be problematic for the GP to be owned by the MIC and for its officers and directors to be MIC officers or employees. Note that in 2012-0450291E5, CRA indicated that the undertaking test could be satisfied by a MIC whose corporate subsidiary owned and managed real property provided that "there are no facts which would suggest that the MIC is involved in the management or development of any real property held by the corporation." CRA rulings also have stated that a majority of the directors of a subsidiary of a mutual fund trust will not be trustees of the trust (ITTN, No. 34).
It would be quite unusual for REITs and income funds, which carry on non-qualifying activities through subsidiary LPs, to not themselves hold the shares of the general partner.
Neal Armstrong. Summary of 2013 Ruling 2013-0487911R3 under s. 253.1.
A hybrid trust must withhold at non-Treaty rates on its distributions of dividends received from its ULC subsidiary
If a Canadian-resident trust, which is fiscally transparent for U.S. purposes and which is the sole shareholder of a ULC, distributes its dividends from the ULC to its beneficiary, who is a U.S.-resident individual, CRA considers that the anti-hybrid rule in Art. IV, subpara. 7(b) will apply, so that the distribution will be subject to full withholding of 25%. The U.S. treatment (of the U.S. beneficiary as carrying on a Canadian branch business) is quite different from what it would be if the trust were not fiscally transparent (distributions taxed on a cash basis). Furthermore, doing a two-step at the ULC level (i.e., increasing PUC, then distributing it) would make no difference.
CRA did not address the situation where the trust subsidiary is an ordinary business corporation.
Neal Armstrong. Summary of 12 February 2014 T.I. 2013-0486931E5 under Treaties – Art. 4.
Income Tax Severed Letters 26 February 2014
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Horizons Managed Futures Index ETF generally will give individual investors deferred capital gains treatment on commodity futures trading
Horizons Auspice Managed Futures Index ETF (the "ETF"), which trades on the TSX, seeks to replicate the return of a tailored index (the "Managed Futures Index"), which tracks the return resulting from going long or short various different commodity, interest rate and currency futures contracts in accordance with a quantitative trading program. The ETF accomplishes this result by entering into long or short forward contracts with NBC for forward prices which collectively track the Managed Futures Index. The hedging arrangements if any between NBC and the actual fund (also managed by the ETF manager) trading in the linked portfolio are not disclosed.
Although gains or losses of the ETF under the forward contracts would be on income account, the forward contracts have a long term (under five years, but with extension rights). Notwithstanding that they are indirectly engaged in futures trading, individual unitholders generally will be able to defer gains until their units are sold, and realize those gains on capital account – except that if a large gain is realized by the ETF under the forwards, taxable unitholders might have to temporarily dispose of their units surrounding the record date for the gain’s distribution.
Neal Armstrong. Summary of Prospectus for Horizons Auspice Managed Futures Index ETF under Offerings – Forward Sale/TRS Funds.
Yoho Resources spin-off of Storm shares uses change in shareholders’ requisition right to qualify as a s. 86 reorg
Yoho Resources (through a subsidiary partnership) recently sold some of its assets to Storm Resources for cash and shares of Storm. It is proposing to distribute the Storm shares through a s. 86 exchange of old Yoho common shares for new common shares and Storm shares. In order that the "new" Yoho common shares will qualify as being distinct from the old common shares (see 2013-0495821C6), there will be a trivial change in the explicit share terms: a right to requisition a shareholders’ meeting will be deleted, although a similar right will continue under the Alberta Business Corporations Act.
Even without this, the distribution of the Storm shares likely would qualify under s. 84(4.1) as a prompt one-time extraordinary distribution of sales proceeds.
Neal Armstrong. Summary of Circular of Yoho Resources under Spin-offs & Distributions – S. 86 reorganization spin-offs.
The foreign affiliate dumping rules do not accommodate significant commercial transactions
Observations of Ian Bradley on the foreign affiliate dumping rules include:
- Earn-outs or other deferred share issuances can be problematic as the subsequent share issuances will not generate cross-border paid-up capital to absorb a potential deemed dividend at the investment time
- A PUC grind under s. 212.3(2)(b) can apply to an unrelated party, e.g., where unrelated vendors receive share consideration from a CRIC (generally, a non-resident controlled Canadian corporation) for the sale of a non-resident corporation
- The s. 212.3(15)(a) rule, that control of a CRIC does not include control by an upper-tier parent, means that a transfer of the CRIC to that indirect parent can result in a second application of the FAD rules
- A partnership arguably acts as a blocker, so that Canadian holding companies that are members of a partnership holding a CRIC cannot qualify as qualifying substitute corporations
- PLOI elections (re accepting imputed interest on debts to exclude them from the FAD rules) are impracticable for cash pooling and other arrangements where intercompany balances are changing every day of the year
Neal Armstrong. Summaries of Ian Bradley, "Living with the Foreign Affiliate Dumping Rules", Canadian Tax Journal (2013) 61:4, 1147-66 under s. 212.3(7), s. 212.3(2), s. 212.3(15)(a), s. 212.3(25)(b) and s. 212.3(11).
Muirhead – Tax Court of Canada notes that clients do not pay overtime rates
Boyle J. (who does not mince words) has clearly articulated that it is irrelevant, in determining whether an individual’s corporation has a personal services business, that the corporation and the services recipient intended their contract to be one for services, as that will always be the case. The focus instead is on whether the individual would have been an employee if his or her corporation didn’t exist. Boyle J also observed that being paid extra for overtime generally is inconsistent with a non-employee relationship.
Neal Armstrong. Summary of G & J Muirhead Holdings Ltd. v. The Queen, 2014 TCC 49 under s. 125(7) – personal services business.
Cameco – Tax Court of Canada acknowledges “proportionality” limitation on document production
Osler spent 14,000 hours on producing documents in the Cameco transfer-pricing case. Justice wanted more.
Rip CJ acknowledged the "proportionality" principle, which requires "dealing with a case in ways which are proportionate to the amount of money involved, the importance of the case and the complexity of the issues." Here there were large amounts and complexity (with no comments on importance.) The Crown’s motion essentially was granted.
Neal Armstrong. Summaries of Cameco Corporation v. The Queen, 2014 TCC 45 under General Concepts – Evidence, s. 169(1), and s. 232(1) - solicitor-client privilege.
CRA finds that an avoidance of Part VI.1 tax likely was not abusive where the preferred shares in question did not replace debt financing
An estate avoided triggering Part VI.1 tax, on a retraction of non-voting preferred shares held by it, by getting the corporation to first redeem special voting shares held by the other shareholder – which was a family inter vivos trust with the same trustees as the executors of the estate and also holding non-voting common shares. This caused the estate's preferred shares to become voting pursuant to s. 48 of the Quebec Business Corporations Act - a provision (somewhat similar to s. 24(4)(b) of the CBCA) which effectively deems all shares to become voting whenever none otherwise has voting rights.
CRA concluded:
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this transaction was not caught by the specific anti-avoidance rule in s. 191(3); and GAAR likely did not apply as Part VI.I "contemplates a situation where a taxpayer replaces a debt financing with a taxable preferred share financing," whereas here, the estate's preferred shares instead had previously been created under an estate freeze;
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there was no acquisition of control of the corporation, as the trustees of the previously-controlling trust were the same as the executors (see Consolidated Holding); and
- the addition of voting rights by mere operation of law did not give rise to a disposition.
Neal Armstrong. Summaries of 18 December 2013 T.I. 2013-0511101E5 F under ss. 191(3), 249(4), s. 248(1) - disposition.
Swirsky - Federal Court of Appeal finds that interest on money borrowed to acquire shares of a company with no dividend-paying history was non-deductible
The taxpayer implemented a plan, involving circular transactions utilizing an economically defeased loan from a trust company, which had the effect of converting shareholder loans owing by him to the family corporation into interest-bearing loans owing by his wife (Ms. Swirsky) to the trust company, which she had incurred to acquire his shares. Before affirming a finding of Paris J that Ms. Swirsky had not established an income-producing purpose for the money borrowed by her, Dawson JA noted that the family corporation had historically not paid any dividends (with bonuses instead being paid) nor did it have a dividend policy in place, and it could be inferred that Ms. Swirsky instead only had a reasonable expectation of receiving a capital dividend.
Although one should not read too much into findings made in the context of a tax scheme, these observations may not be comforting to those who deduct interest on loans incurred to acquire non-dividend bearing common shares.
Neal Armstrong. Summaries of Swirsky v. The Queen, 2014 FCA 36, aff'g 2013 TCC 73, 2013 DTC 1078 [at 431], under s. 20(1)(c), General Concepts - onus, and General Concepts - intention.