News of Note
Income Tax Severed Letters 5 June 2013
Email this ContentThis morning's release of 22 severed letters from the income tax rulings directorate is now available for your viewing.
Boardwalk - Federal Court of Appeal appears to find that form of invoice drives the substantive GST result
Under an Alberta government program to defray high energy costs, a supplier of natural gas to Boardwalk would charge Boardwalk the full price of, say, $100 plus GST of $7 thereon, and on the same invoice show a credit for the amount of the government grant of, say, $20 that would be received by the supplier from the government on the due date of the invoice.
In these circumstances, Webb JA found that GST was payable by Boardwalk on the full $100. He reasoned that the supplier did not accept the government grant as a partial payment of the consideration until the subsequent due date for the invoice, i.e., after the GST had already been triggered on the invoice date.
This seems to suggest that if the supplier had instead simply charged GST on the ($80) net amount (implying that it was taking on the slight risk of not subsequently receiving the $20 grant), Boardwalk's GST liability would have been reduced to $5.60.
Neal Armstrong. Summary of Boardwalk Equities Inc. v. The Queen, 2013 FCA 140 under ETA - s. 123(1) - consideration.
Lehigh – Tax Court of Canada rejects application of s. 95(6)(b) to double dip structure: there was only U.S. tax avoidance
The use of a double-dip structure (i.e., taxpayer borrows to contribute to an LLC which is a partnership for US purposes, with the LLC lending to US Opco) was unsuccessfully challenged under s. 95(6)(b) as no Canadian tax was avoided: the relevant comparator was for the taxpayer to use the borrowed money to invest directly in U.S. Opco.
This structure no longer "works" under the upstream loan rules as U.S. Opco was a sister of the taxpayer rather than a controlled foreign affiliate.
Neal Armstrong. Summary of Lehigh Cement Ltd. v. The Queen, 2013 TCC 176 under s. 95(6)(b) (with diagram).
Groupe Honco - Federal Court of Appeal finds that a 5-year separation is not enough time to break a series
The taxpayers in a s. 83(2.1) case (respecting the denial of capital dividend treatment where one of the main purposes of a series of transactions including an acquisition of shares was to receive a capital dividend from other than a safe harbor source) were a casualty of the Copthorne doctrine that the "in contemplation of" extension in s. 248(10) of the "series of transactions" concept included backward-looking contemplation.
The taxpayers argued that five years between the share acquisition and the capital dividend was too long for there to be a series. However, applying Copthorne, the Court found that the subsequent capital dividend payment clearly contemplated the previous acquisition of the target corporation’s capital dividend account.
Neal Armstrong. Summaries of Groupe Honco Inc. v. The Queen, 2013 CAF 128 under ss. 248(10) and 83(2.1).
CAE – Federal Court of Appeal, rejecting IT–218R, finds that conversion from rental property to inventory gives rise to a deemed disposition under s. 45(1)
In IT-218R, CRA states that the conversion of property from income-producing capital property to inventory is not governed by the change-of-use rules in ss. 45(1)(a) and 13(7)(a), because the property is used for an income-producing purposes both before and after.
Noël JA disagreed. Where manufactured equipment was used in a leasing activity, so that it was depreciable property, its subsequent offering for sale (or, it would appear, the granting of a contingent option to acquire it) would cause a conversion at that point into inventory, so that there would be a deemed disposition under ss. 45(1)(a) and 13(7)(a).
This finding will be problematic for CRA. For example, in reporting real estate sales, taxpayers on further reflection might conclude that there had been a basis step-up on a change of use in a statute-barred year.
Neal Armstrong. Summaries of CAE Inc. v. The Queen, 2013 FCA 92 under ss. 45(1)(a) and s. 9 – Capital Gain v. Profit – Machinery and Equipment.
Share reorganization of a CRIC will preclude subsequent PUC reinstatement
The reinstatement rule in the foreign affiliate dumping rules generally provides for the restoration of paid-up capital of a class of shares of a corporation resident in Canada (or a qualifying substitute corporation) when it distributes the foreign affiliate shares (or proceeds thereof) the investment in which gave rise to the previous grind in that PUC.
This reinstatement rule only applies to the same class of CRIC or QSC shares to which there was a previous grind. Accordingly, access to reinstatement will be lost if such shares are exchanged for shares of another class or for shares of a related corporation. See Example 9-C.
Neal Armstrong. Summary of Henry Chong, "Section 212.3: Missing PUC Adjustments", Canadian Tax Highlights, Vol. 21, No. 5, May 2013, p. 12 under s. 212.3(9).
CRA countenances arrangements for reimbursement by subsidiary employers for the fair value of parent LTIP stock option grants as at the grant date
CRA historically has indicated that a "reimbursement" payment by a non-resident subsidiary to its Canadian parent for the difference between the fair market value of shares of the parent company on the date of exercise of options on the shares of the parent previously granted to employees of the subsidiary, and the exercise price, generally does not result in an inclusion in the income of the parent under s. 15(1), 12(1)(x) or 90 (see 9 October 2001 T.I. 2000-003491) - and conversely re s. 214(3)(a) in the non-resident parent/Canadian subsidiary employer situation (see 1999 Ruling 990259 for a variation on this).
CRA has now indicated that there will be no benefit (giving rise to Part XIII tax under s. 214(3)(a)) where the Canadian employer/subsidiary reimburses its non-resident parent for the fair value (as computed under IFRS-2) of employee stock option grants at the date of the option grant. It seems to be implicit in this that the Canadian sub would not be expected to make a further reimbursement payment on option exercise.
Neal Armstrong. Summary of 29 April 2013 T.I. 2010-035640 under s. 15(1).
Income Tax Severed Letters 29 May 2013
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Loblaws is spinning off 75% of its real estate into Choice Properties REIT
Loblaws is proposing to transfer 75% of its Canadian real estate, with a value of $7.3 billion, to a subsidiary LP of a new REIT (Choice Properties REIT). However, only about $600 million of units with a yield of around 6.5% are being issued to the (mostly-Canadian) public, so that, initially at least, loss to the fisc will be modest even if there are a significant number of RRSP purchasers. (No estimate of the tax deferred percentage is given.) Loblaw will get most of the $600 million unit offering plus all of the $600 million to be raised under a separate public debenture offering by the REIT.
In addition to the usual use of the issuance of exchangeable Class B units of the subsidiary partnership to Loblaw subsidiaries, they also are taking back Class C preferred units with a fixed return (perhaps in order to service retained debt, somewhat similarly to Melcor). Unusually, the holders of the Class B exchangeable units are entitled to participate in a DRIP for their Class B units (with a 3% bonus unit feature, and a right to be paid distributions in REIT units rather than Class B units), to mirror a DRIP at the REIT level.
Neal Armstrong. Summary of Choice Properties REIT preliminary prospectus under Offerings - REIT and LP Offerings - Domestic REITs.
CRA finds that a foreign demerger transaction does not give rise to a shareholder benefit
CRA has concluded that a foreign demerger transaction under which part of the assets of FA1 are transferred to FA2 (in the same jurisdiction) for no consideration, with FA2 issuing shares to the Canadian parent with a foreign paid-up capital equal to the book value of the assets which are transferred to it, and with a corresponding reduction in the foreign paid-up capital of the shares of FA1, qualifies as giving rise to a deemed dividend under draft s. 90(2), so that there is no taxable shareholder benefit to the Canadian parent. Similar considerations arise if FA1 and FA2 are held through an intermediate foreign holding company.
An example of this type of demerger transaction is a German sideways spin reorganization.
Neal Armstrong. Summary of 23 May 2013 IFA Round Table, Q. 2 under s. 90(2).