News of Note
The Canadian competent authority will apply pre-Fundy amorphous criteria in the context of reviewing a trust's residency under the Canada-US tie-breaker rule
Email this ContentThe Fundy Settlement case established that the residence of a trust turns on where its central management and control is exercised. However, where a trust is resident both in Canada and the United States under each jurisdiction's general rules, the Canadian competent authority, in an endeavour to resolve the trust's residency under Art. IV (4) of the Canada-US Convention, will consider such factors as the residency of the settlor and beneficiaries, the location of the trust property, and the reason the trust was established in its jurisdiction. CRA also notes that Art. IV(4) only obliges the authorities to attempt rather than reach a resolution of the residency question.
As s. 4.3 of the Income Tax Conventions Act trumps the Convention, the Convention's tiebreaker rules cannot be applied where s. 94(3) deems a trust to be resident in Canada.
Neal Armstrong. Summary of 11 October 2013 APFF Round Table Q. 3, 2013-049281 F (Dual residency of a trust) under Treaties - Art. 4.
Global Cash Access - Federal Court of Appeal applies "commercial efficacy" (rather than Marxist labour theory of value) approach to find that mostly clerical services were a financial supply for GST purposes
Global Cash Access, which arranged for cash advances from credit card issuers to the patrons of casinos, paid a fee to the casino, which provided space for Global's terminals (which were used to approve the transactions) as well as preparing a sort of cheque that the patron cashed in at the casino cashier. Although from CRA perspective (which you might label as following Marx's labour theory of value), what the casino was mostly getting paid for was its clerical services and the provision of the space, Sharlow JA found that the "commercial efficacy" of the whole arrangement turned on the provision of the cash by the casino, so that the fee was consideration for a single supply of a financial service.
This same approach (that what was really being paid for was the "cheque" cashing function, even though that part of it was easy) also dictated a conclusion that the clerical/space provision aspects were not the "predominant" element of what was being supplied, so that the exclusions in paras. (r.4) and (r.5) of the financial services definition did not apply. This, in turn, suggests that these exclusions, which seemed like a big deal when they were introduced, may be benign.
Neal Armstrong. Summary of Global Cash Access (Canada) Inc. v. Canada, 2013 FCA 269, under ETA - s. 123(1) - "financial service."
CRA treats post-redemption payments to a contributing taxpayer as a dividend at the time
Several years after the redemption of preferred shares which the taxpayer had received for the transfer under s. 85(1) of property to Opco, CRA determines that the transfer had occurred at an under-valuation, so that the taxpayer receives an additional payment from Opco "pursuant to" the price adjustment clause in the redeemed shares. CRA considers that this payment will be recognized by the taxpayer as a dividend in the year of payment.
In many situations, the taxpayer would be better off not implementing such a price adjustment clause.
Neal Armstrong. Summary of 29 October 2013 T.I. 2013-0507881E5 ("Price adjustment clause") under s. 84(3).
S. 39(2) applies to FX movements on dividends between declaration and payment
As a dividend (declared in a foreign currency) becomes a debt at the moment of its declaration, the subsequent FX movement will be recognized under s. 39(2) on payment, so that the exclusion from the application of s. 39(2) for "a transaction or event in respect of shares of the capital stock of the taxpayer" will not apply.
Neal Armstrong. Summary of 5 November 2013 T.I. 2013-0501241E5 F under s. 39(2).
Income Tax Severed Letters 20 November 2013
This morning's release of 11 letters from the Income Tax Rulings Directorate is now available for your viewing.
GST which obviously has been erroneously billed must still be remitted
A supplier erroneously generates an invoice including GST for a non-existent supply, and the "recipient" of course refuses to pay. In CRA’s view, this GST must be included in the supplier’s monthly GST remittance, as ETA s. 225(1) "requires every person to include in its net tax calculation all amounts that became collectible." This is an odd interpretation of "collectible."
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 36. ("ETA 169/225") (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx) under ETA – s. 225(1).
South American Silver acquisition of High Desert would use an alphabet share to funnel contingent expropriation proceeds only to SAS shareholders
High Desert Gold is to be acquired under a joint BC plan of arrangement by South American Silver ("SASC") for SASC shares. However, to ensure that HDG shareholders do not share significantly in any arbitration award made as a result of the seizure of a Bolivian mine of a subsidiary of SASC, SASC first will undergo a s. 86 reorganization under which its common shares will be exchanged for Class A shares (with rights apparently identical to the common shares), and Class B shares which are redeemable and retractable for 85% of any net arbitration award or settlement, subject to an overriding call right of a SASC subsidiary (Newco) to purchase the shares for the redemption amount. Thus, the HDG shareholders will receive only Class A shares (which will be promptly redesignated as common shares).
There is no discussion in the Circular as to how the stated capital of the Class B shares will be determined, which might initially trade on the TSX for far less than any ultimate award. The Newco call right might be intended to avoid tax under Parts IV.1, VI.1 or XIII, although there is no suggestion that the Class B shares are taxable preferred shares nor any specific comment that redemption of the Class B shares could give rise to a deemed dividend.
SASC will be continued to BC before the arrangement, as the corporate incest rules in the CBCA would prohibit Newco from exercising its call right.
Neal Armstrong. Summary of South American Silver Circular under Public Transactions – Mergers – Share-for-Share.
CRA is equivocal about grandfathering those hurt by a retroactive change in its GST policy on gift certificates
CRA without warning retroactively (back to 1991) changed its Policy Statement respecting gift certificates which did not bear a specific dollar amount, so that GST was applicable not when the gift certificates were sold but instead when they were subsequently redeemed. This could result in double taxation of registrants who relied on the old Policy. Rather than simply saying that such registrants are grandfathered, CRA stated that "Audit will exercise discretion if it encounters situation in which a registrant has been acting in accordance the [old] Policy Statement."
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 35. ("Gift Certificates") (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx) under ETA – s. 181.2.
GAAR was applied by CRA to the avoidance of s. 93(2) through continuing an LLC previously used in a tower structure into Canada
An LLC had been used in a classic tower structure that then was unwound. The Rulings Directorate noted that CRA had applied the general anti-avoidance rule to transactions which had sought to avoid the application of the stop-loss rule in s. 93(2) to a capital loss realized on the winding-up of the LLC (as part of the dismantling of the tower structure) by first continuing the LLC under the CBCA.
Turning to the transactions now in issue, the Directorate indicated that "subsection 248(5) contemplates rules of interpretation which establish the scope of the concept of substituted property for purposes of the Act" – i.e., rather than merely being a deeming provision, s. 248(5) codifies the concept of substituted property for purposes of the Act?
Neal Armstrong. Summary of 25 September 2013 Memorandum 2013-0476311I7 F ("93(2), 93(2.01) - Share substituted") under s. 93(2.01).
Calloway REIT will eliminate its subtrust under a s. 132.2 merger without a unitholder vote
Calloway REIT will be eliminating its subtrust on a rollover basis. First, the subtrust 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. These same general mechanics have been ruled on (see s. 132.2 – qualifying exchange).
The transaction does not require unitholder approval (so that there will be no circular) and is being implemented without a plan of arrangement (e.g., the second stage of the s. 132.2 merger is to be implemented through a unilateral redemption of units).
Neal Armstrong. Summary of 1 November 2013 OSC Order for Exemptive Relief respecting Calloway REIT under Other - Subsidiary S. 132.2 Mergers.