News of Note
McKesson - Boyle J referred to the taxpayer’s “pig in a poke” approach to justifying a high discount rate on intercompany receivables sales in the previous Tax Court of Canada hearing
Email this ContentIn McKesson, Boyle J found that the taxpayer had been selling its trade receivable to its immediate Luxembourg parent (MIH) at discounts which were excessive from a transfer pricing perspective. In a subsequent decision, he has now recused himself from dealing with residual issues on the basis that taxpayer’s counsel had lied about his trial conduct and reasons for judgment in their Federal Court of Appeal factum - which would reasonably be expected to vex him sufficiently to affect his impartiality.
While accepting Boyle J’s statement that such reasons "are very clear" on important points, his explanations of the "untruths," including quotes from the extensive exchanges from the bench at trial, are illuminating:
- He had expressed concern about the taxpayer, which began with a cost of funds of nearing 5%, quadrupling this cost on the basis of laying off risk to MIH.
- The taxpayer’s approach, that (ignoring MIH’s knowledge and control as parent) MIH was "buying a pig in a poke," so that it was taking on a lot of risk, would mean that "virtually every Canadian subsidiary…[could] be re-pricing to 5 year junk rates."
- However, in his trial reasons, it had not been necessary to rely on the likely law that this parent-sub relationship could be taken into account, as on the face of the receivables purchase agreement, MIH had an out once the collection performance began to deteriorate (i.e, low risk).
Neal Armstrong. Summary of McKesson Canada Corp. v. The Queen, 2014 TCC 266 under s. 247(2).
CRA recognizes that significant amendments may not result in a new obligation
The question whether a new (post March 2013) obligation has arisen for purposes of the LIA policy definition is similar to the question whether there has been a loan disposition. On the first question, CRA states that "a change in the interest rate, an extension of the duration of loan or a change to the terms of repayment may not, in and of itself, result in a new loan. Such a determination can only be made after a review of the terms of the particular loan agreement."
Neal Armstrong. Summary of May 2014 CALU Roundtable, Q. 1, 2014-0523261C6 under s. 248(1) – LIA policy.
CRA will not provide certificates of residency for Canadian partnerships
CRA will not provide a certificate of residency for a Canadian partnership (i.e., with only Canadian-resident partners) even though this can be a significant impediment to carrying on business in some foreign jurisdictions.
Neal Armstrong. Summary of 3 December 2013 TEI Roundtable Q. 9, 2013-0510851C6 under s. 2(1).
CRA considers that refundable tax in an RCA trust cannot be recovered through setting up a replacement trust
CRA is not amenable to recovering the build-up of recoverable tax in an RCA trust (securing retirement benefits through LCs held in the trust) by winding it up and establishing a new RCA trust that acquires new LCs to secure the promised member benefits: a mere "change of the custodian… does not result in the termination of the RCA trust itself (or a distribution from the RCA)."
Neal Armstrong. Summary of 7 July 2014 T.I. 2013-0511061E5 under s. 207.5(2).
CRA accepts that an executor can make a late election on the deceased’s behalf
CRA accepts that an executor has the capacity to make a late s. 45(2) election (respecting suspension of a principal residence’s conversion into a rental property) "on behalf of" the deceased.
Analogous issues may arise following a corporate merger or dissolution.
Neal Armstrong. Summary of 22 August 2014 T.I. 2014-0541171E5 under s. 220(3.2).
CRA rules on using an LP to avoid application of the anti-hybrid rule to interest paid by a ULC to its S Corp parent
A U.S. S Corp which currently is subject to 25% Canadian withholding tax on interest paid on a note of its wholly-owned ULC subsidiary due to the application of the anti-hybrid rule in Art. IV(7)(b) of the Canada-U.S. Treaty, will avoid that withholding tax by transferring the note to a newly-formed LP between it and one of its individual shareholders (presumably with a much more modest partnership interest than it).
CRA ruled that this would avoid Art. IV(7)(b) on the basis that, for Code purposes, interest on the note "will be reported as income of LP…in the same manner as the interest would be if ULC was not fiscally transparent" under the Code.
Neal Armstrong. Summary of 2014 Ruling 2013-0491331R3 under Treaties – Art. 4.
Otteson – Tax Court of Canada finds that references to a qualifying real estate property could refer only to the qualifying portion of the property
The taxpayers faced a problem in claiming the capital gains exemption on a sale of their property: only about half of the property was being used as a tree farm, so that it was borderline at best as to whether it was a qualified farm property.
Solomon proposed splitting a baby in two. Similarly, Hogan J found that there was no requirement to regard the property as a whole ("otherwise land that has been legally subdivided would be preferred to land that has not been,") and concluded that the taxpayers could claim the exemption on a pro rata portion of the property.
Neal Armstrong. Summary of Otteson v. The Queen, 2014 TCC 250 under s. 110.6(1) - qualified farm property and s. 96.
CRA acknowledges USA relevance to deemed control branch of CCPC definition
CRA has acknowledged that its previous position in ITTN no. 44 that "unanimous shareholder agreements are not to be considered in applying … the definition ‘Canadian-controlled private corporation’" in s. 125(7) para. (b), "cannot be reconciled with the interpretation … by the Courts in Bagtech."
Neal Armstrong. Summary of 2014 CALU Roundtable, Q. 3, 2014-0523301C6 under s. 125(7) – Canadian-controlled private corporation.
CRA considers that investment counselling fees for segregated fund purchases/redemptions are not deductible
CRA considers that investors in segregated funds cannot deduct related investment counselling or management fees under s. 20(1)(bb): "a segregated fund policy is a contract of insurance and … is not a … security."
Neal Armstrong. Summary of 2014 CALU Roundtable, Q. 5, 2014-0523321C6 under s. 20(1)(bb).
Income Tax Severed Letters 3 September 2014
This morning's release of 16 severed letters from the Income Tax Rulings directorate is now available for your viewing.