News of Note
CRA will not apply s. 56(2) so as to result in double taxation
Email this ContentS. 6(1)(a) only requires the inclusion in employment income of a benefit "received or enjoyed." However, where the employee foregoes the benefit and directs that it go to someone else, CRA considers that the employee generally will be taxable on the benefit under s. 56(2) - but if the amount was included in the employee’s income under s. 56(2), it "would not be required to be included" in the income of the recipient of the benefit. (This statement also appears in IT-335R2, para. 13, but with the weasel word "normally" added.)
Neal Armstrong. Summaries of 10 April 2014 T.I. 2013-0514321E5 under s. 56(2) and s. 6(1)(a). See also summary of 13 March 2014 T.I. 2013-0510791E5 under s. 56(2).
CRA rules on the addition of FX-hedged units to a mutual fund
An open-end mutual fund trust will add a "hedged" class of units, whose performance will not be affected by fluctuations in the Canadian dollar relative to the currencies of the underlying foreign securities of the fund due to the allocation of gains or losses on forward currency contracts strictly to the hedged class.
CRA ruled that this addition will not result in a disposition of the existing units, a resettlement of the fund or the application of s. 104(7.1).
Neal Armstrong. Summary of 2014 Ruling 2014-0518521R3 under s. 104(7.1).
CRA considers that s. 12(1)(x) could apply to the compromise under the BIA of interest and penalties on unremitted GST (but not of the GST itself)
CRA has confirmed that, although the forgiveness of trade debts in the same year as they are incurred gives rise to s. 9 income, this will not be the case for trade debts compromised under Part III of the Bankruptcy and Insolvency Act. Where there is such a compromise of a claim of the government for unremitted GST, s. 80 will not apply (on the basis that the unpaid GST is not a debt obligation "issued" by the debtor.) However, rather intriguingly, CRA considers (in cryptic reasoning) that s. 12(1)(x)(iv) "could" apply to the compromise of interest or penalties on the unpaid GST (but not of the GST itself), unless a s. 12(2.2.) election is made.
Neal Armstrong. Summaries of 20 May 2014 T.I. 2013-0516121E5 F under s. 9 – debt forgiveness, s. 12(1)(x) and s. 80(1) – commercial debt obligation.
CRA will assess a s. 92(5) gain at the Canadian partner level where there is a "rollover" transfer of a foreign affiliate subsidiary of the partnership which has received pre-acq dividends
Where a partnership (LP) received a dividend from Forco out of pre-acquisition surplus, and LP subsequently rolled its shares of Forco into a Canadian subsidiary (ULC) of LP under s. 85(2), the capital gain resulting under s. 92(5) to Canco from this disposition (based on its "share" of the previous pre-acquisition dividend) did not affect the operation of the s. 85(2) election at the LP level.
In commenting on this and similar situations at the 2014 IFA Conference, CRA indicated that there would be no administrative relief notwithstanding that the transaction triggering the s. 92(5) gain was a transaction intended to occur on a rollover basis. This illustrates one of the pitfalls in utilizing partnerships at an intermediate level within a Canadian multinational structure.
Neal Armstrong. Summaries of 7 May 2014 Memo 2012-0433731I7 and May 2014 IFA Roundtable, Q. 5, 2014-0526751C6 under s. 92(5).
Prescribed interest on a foreign currency PLOI is translated at the spot rate when the loan was made
When a Canadian-resident corporation elects for a qualifying loan made by it to a non-resident affiliate to be a pertinent loan or indebtedness, for example, a non-interest-bearing U.S.-dollar loan made to a non-resident subsidiary, it will compute the prescribed interest rising on the loan under s. 17.1 using the spot rate at the date the loan was made (assuming it has not made a functional currency election).
Neal Armstrong. Summary of 4 June 2014 T.I. 2014-0517151E5 under s. 261(2).
Marzen Artistic Aluminum – Tax Court of Canada shifts 100% of the income of a U.S. marketing operation from Barbados to Canada
The taxpayer, a Canadian window manufacturer which sold its windows in B.C. and the U.S., generated essentially all its profits in its Barbadian subsidiary (SII), which essentially had no assets or employees other than its (very part-time) Barbadian managing director: the taxpayer sold windows for the U.S. market to its U.S. subsidiary ("SWI") at their retail price; SII charged "marketing fees" to the taxpayer which were sufficient to reduce the taxpayer’s income to nil; SII paid fees to SWI for the SWI employees ("seconded" to SII) who did the marketing work at SWI’s payroll cost plus 10%; and SII paid dividends (out of exempt earnings generated from the substantial mark-up of its fees over those of SWI) to the taxpayer which essentially were equal to 100% of the profit of the consolidated group.
Sheridan J applied s. 247(2)(c) to reduce the marketing fees to the sum of: the fees paid by SII to SWI; and those paid to its managing director (which she treated as the comparable uncontrolled price for SII’s services to the taxpayer). One effect of this adjustment was that 100% of the profits of SWI, which it might have earned had it been charged for windows at the wholesale rather than retail price, were shifted from Barbados to Canada, i.e., it was not just profits which normatively should have been earned in Canada which were shifted back to Canada.
This point was not argued directly, but it came up indirectly respecting the approach of the taxpayer’s transfer pricing expert, who considered that the marketing fees paid by the taxpayer were appropriate if they were treated as paid to SII/SWI as an "amalgam." Sheridan J found this to be contrary to the separate entity approach mandated in the 1995 OECD Guidelines (which she referred to rather than the subsequent 2010 Guidelines).
Neal Armstrong. Summaries of Marzen Artistic Aluminum v. The Queen, 2014 DTC 1145 [at 3433], 2014 TCC 194 under s. 247(2) and s. 247(4).
Income Tax Severed Letters 18 June 2014
This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that a single condo unit can be a hotel for GST/HST purposes
A residential complex for GST/HST purposes does not include a hotel or inn. CRA considers that where there is a building with multiple condo units (in this case, a condominium resort), each unit is tested to see if it is a hotel or inn on its own rather than by reference to the character of the building as a whole. In P-099, CRA indicates that a hotel or inn generally provides temporary accommodation to the public, with ancillary services where appropriate.
Neal Armstrong. Summaries of 22 July 2013 Interpretation 145125 under ETA – S. 123(1) – Residential complex and General Concepts – Ownership.
Joint Committee makes submissions on acting–in-concert and partnership control concepts in draft Folio
In response to the release in draft form of Folio S1-F5-C1 entitled "Related persons and dealing at arm’s length," the Joint Committee has made detailed submissions that a statement - that highly interdependent dealings presumptively establish a non-arm’s length relationship - does not accord with the jurisprudence, and also has suggested an acknowledgment that generally it is the GP of a limited partnership who controls corporate investments of the partnership.
Starlight No. 3 Fund will avoid FAPI treatment of gains on sale in three years’ time of U.S. apartment buildings by U.S. private REIT subsidiary
The public offering for the Starlight U.S. Multi-Family (No. 3) Core Fund (an Ontario LP) is similar to those for the No. 1 and No. 2 funds. It will invest in U.S. apartment buildings through LLC subsidiaries of a private U.S. REIT. An Ontario subsidiary LP (which will be a corporation for Code purposes) and a Delaware LP will be sandwiched between the public LP and the U.S. private REIT. This will help insulate the public Ontario partnership from the U.S. public partnership rules and may simplify U.S. FIRPTA withholding requirements - while at the same time the structure will still be treated as transparent (under Art. IV.6) for the purposes of U.S. withholding on dividends and interest paid by the U.S. private REIT.
It is intending avoid FAPI treatment on the net rental income and gains on dispositions of the apartment buildings (expected to occur in three years’ time) by relying on the over-five employee safe harbor for leasing businesses and the mother ship tests. 3.5% of the anticipated annual returns of 12% per annum over the three year (partly extendible) term of the Fund are anticipated to come from gains from the sale of the buildings. If the returns from the U.S. business came mostly from (income account) gains from the buildings, the FAPI exclusion would be quite problematic but, as noted, this is not projected to be the case. From a U.S. REIT rule perspective, there is a safe harbour for properties that are held for at least two years if no more than seven properties are sold in a year.
Neal Armstrong and Abe Leitner. Summary of preliminary prospectus for Starlight U.S. Multi-Family Core (No. 3) Fund under Offerings – REIT and LP Offerings - Foreign Asset Income Finds and LPs.