News of Note
A partner loan works in Alberta
Email this ContentCRA has partially acknowledged common law that a partner cannot receive payments from the partnership qua contractor rather than partner (ITTN 30, citing Crestglen), although it also is prepared to recognize that this can be overriden by applicable provincial statutes (see 2001-0103605 F, 2001-0095675 (re s. 12(2) of Ontario LPA), and ITTN 30, fn. 9 (citing inter alia s. 60 of Alberta and Saskatchewan Partnership Acts).
Skingle and Jankovic suggest that s. 10(1) of the Law of Property Act (Alberta) overrides this common law where there is a partner loan (or other property transfer such as a lease).
Similar statutes in other provinces may be less helpful. In Rye, the House of Lords found that a provision essentially the same as s. 41 of the Conveyancing and Law of Property Act (Ontario) did not validate a purported lease of property by partners to their partnership.
Neal Armstrong. Summary of Ken S. Skingle and V. Daniel Jankovic, "Can a Partner Enter into a Contract with a Partnership of Which the Partner Is a Member?", Tax for the Owner-Manager, Volume 13, Number 4, October 2013, p. 8 under s. 96(1)(g).
CRA considers that an employer “Buyco,” intended to give employees capital gains treatment for their shares, is not at arm’s length
An employer (Opco) incorporates a special-purpose corporation (Buyco) in order to provide capital gains treatment on the purchase of shares previously issued to employees under an employee share ownership plan. CRA (citing RMM and Petro-Canada) considers Buyco to not be dealing at arm’s length with the employees: CRA characterizes Buyco as an accommodation party not acting in its own separate economic interest.
Accordingly, in 2012 CRA declined to give rulings that s. 84.1 would not apply to generate a deemed dividend on the cash sale price.
Neal Armstrong. Summary of November 2012 CRA Panel discussion, 2013-0479402C6, under s. 251(1)(c).
Income Tax Severed Letters 9 October 2013
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Congiu – Tax Court of Canada defers to the Cour du Québec
The taxpayer was assessed under the equivalent GST and QST provisions of s. 159 for distributing property without a clearance certificate. The Quebec assessment was judicially reviewed first, and while this decision was under appeal by her to the Quebec Court of Appeal, her federal appeal came before Angers J on the basis of an agreed statement of facts reflecting the findings in the Quebec action.
Although the federal action was not res judicata (there were different taxing statutes and governments involved), Angers J found that it would be an abuse of process to consider essentially the same dispute, as there was a need to maintain "coherence" in judicial dispositions of the same question.
Neal Armstrong. Summary of Congiu v. The Queen, 2013 CCI 271, under General Concepts – Res Judicata.
CRA confirms that the salary imputation rule in Reg. 402(7) is narrow (and may be impracticable)
Reg. 402(7) provides that where a corporation pays a fee to a third party for services which would "normally" be performed by its employees, the part of the fee that may reasonably be regarded as a payment in respect of services rendered at a particular permanent establishment of the corporation shall be deemed to be salary paid to an employee of the corporation at that permanent establishment for purposes of the Part IV provincial income allocation rules. Reg. 402(6) effectively treats partnerships as transparent under these rules.
CRA dealt with the application of Reg. 402(7) in a two-tier partnership structure, where a "bottom" partnership paid fees to a 3rd party manager. The "normally" test required that: the third party service previously had been provided by employees of the recipient partnership; the partnership had employees; and the manager’s assignment was a short-term one.
CRA considered that any profit element in an otherwise-qualifying management fee should be backed-out; and had no words of wisdom as to how the partners of the top-tier partnership would be able to figure this out.
Neal Armstrong. Summary of 25 September 2013 T.I. 2013-0477571E5 F under Reg. 402(7).
CRA states that GAAR reassessments of statute-barred years should be "rare"
CRA considers that "the reassessment of statute-barred years where GAAR is the assessing authority should be rare."
The correct word is "impossible." Taxpayers have no discretion under s. 245(2) to alter the application of the Act to their transactions in accordance with their personal views of its policy. As decided in Copthorne, "there is nothing in the GAAR provisions that would allow a taxpayer to self assess on the basis that GAAR applies." If taxpayers have no authority to self-assess themselves under GAAR (or obligation to report under s. 237.3), how can failure to do so be careless or negligent?
Neal Armstrong. Summary of 9 November 2012 CTF Atlantic Roundtable Q. 5, 2012-0465921C6 ("Statute Barred Years") under s. 152(4)(a)(i).
CRA accepts, based on Rezek, that elections required to be filed with a return are considered timely even if the return itself is late
CRA accepts the Rezek decision for the proposition that where there is a requirement to file an election with a taxpayer's return, the election's filing will be considered to be timely if the election is filed with an overdue return.
However, the converse also holds - an election filed after the return's filing will be considered late even if it is filed before the return's due date. This is problematic for electronic return filing, where electronic filing of elections "in the return" is not accommodated. CRA is considering administrative concessions, as discussed in 9 November 2012 CTF Atlantic Roundtable Q. 8, 2012-0465981C6.
Scott Armstrong. Summary of 18 September 2013 T.I. 2013-0487871I7 ("Filing Due Date for Elections") under s. 220(3.5).
CRA (changing its mind) will allow a s. 110.5 adjustment 3 years beyond the normal reassessment period
S. 152(4)(b)(iv) provides that the Minister may reassess three years beyond the normal reassessment period "as a consequence" of any payment of foreign income tax. This permits a reassessment to allow a taxpayer's foreign tax credit claim.
But what if the taxpayer is asking to have its taxable income increased under s. 110.5 in order to generate a foreign tax credit? CRA (reversing 2010-0379801I7) considers that, in this situation, "there is a causal connection between the foreign tax paid and the adjustment to claim the foreign tax credit, regardless of whether the adjustment includes an addition to income under the provisions of section 110.5."
By analogy with the CCA revision policy in IC 84-1, an assessment under s. 110.5 may be made even beyond the six-year s. 152(4)(b)(iv) period "where there is no change in the tax payable for the year." "Tax" includes provincial taxes, so that a requested adjustment under s. 110.5 for a statute-barred year will not be permitted if it increases provincial taxes payable. 2010-0379801I7 suggests that this usually will be a problem.
Neal Armstrong. Summary of 16 July 2013 Memorandum 2013-0481151I7 under s. 152(4)(b)(iv).
CRA effectively exempts a receipt to which s. 56(2) already has applied
CRA considers that where a real estate agent directs the real estate brokerage to pay a portion of a home-purchase commission to the purchaser, the amount of this "referral fee" will be included in the agent's income under s. 56(2) irrespective of whether it is income to the purchaser. Furthermore, as "it is the practice of [CRA] not to assess the same income twice," the brokerage would not be expected to issue a T4A to the purchaser.
This arguably is a "reverse Winter" situation. That case (as limited by James) may indicate that if an amount is earned as income by the recipient, s. 56(2) does not impute income to a 3rd party who directed that benefit. In any event, CRA presumably was mindful that most purchasers would treat the referral fee as an inducement that was not taxable under s. 12(1)(x).
Neal Armstrong. Summary of 19 August 2013 T.I. 2013-0488011E5 ("Real Estate Referral Fees") under s. 56(2).
Oil and gas coordination centres likely are distinct permanent establishments
Jan de Goede and Ruxandra Vlasceanu suggest under the general OECD commentary principles that unincorporated coordination centres, which provide support to the various oil and gas exploration and production blocks of a joint venture in the same country (such as accounting, administration, finance, human resources, treasury, information and communication, technical support, and supervision activities) (1) are permanent establishments, as their activities are more than preparatory or auxiliary, and (2) are distinct permanent establishments from the exploration and production blocks since such multiple places of business lack geographic and commercial coherence.
Neal Armstrong. Summary of Jan de Goede and Ruxandra Vlasceanu, "Permanent Establishment Implications for Coordination Centres in the Oil and Gas Industry", Bulletin for International Taxation, September 2013, p. 466 under Treaties – Art. 5.