News of Note
CRA treats trailer fee rebate payments as trust distributions rather than inducements
Email this ContentCRA considered the payment by a mutual fund trust of rebates to a large investor equal to a proportionate part of the trust expenses used to fund the payment of trailer fees - and which the dealer in question had agreed to forego.
CRA indicated that this rebate payment generally will be treated in the usual manner as a distribution from the trust to the investor qua beneficiary - rather than as an "inducement" paid to the investor. The latter characterization, which could generally result in an income inclusion to the trust under s. 12(2.1), would have been problematic.
Neal Armstrong. Summaries of 12 October 2012 T.I. 2012-0448351E5 under s. 12(2.1) and s. 104(7.1) and summary of 16 October 2012 T.I. 2012-049061E5 under s. 104(13).
Income Tax Severed Letters 31 October 2012
This morning's release of 21 severed letters by the Income Tax Rulings Directorate is available for your viewing.
Ruling addresses complications of combining a split-up butterfly of DC with a Code s. 355 indirect spin-off of DC by non-resident public parent
In order for a non-resident publicly-traded corporation to distribute two of its three businesses to its shareholders as a dividend-in-kind (so that it effectively was converted into three publicly traded corporations), it was necessary for one of its indirect Canadian subsidiaries (DC - which was a direct subsidiary of Foreign Sub 1) to effect a butterfly reorganziation under which: a portion of its assets were butterflied to a new Canadian subsidiary of Foreign Sub 1 (TC); the equity of DC (in the form of new common shares issued on the usual preliminary s. 86 reorganization) was transferred indirectly to Foreign Spinco 1; and the shares of Foreign Spinco 1 (along with those of Foreign Spinco 2, which held the second business) were then distributed to the public. In light of the fact that the shares of Foreign Spinco 1 were to be disposed of by a specified shareholder of DC (Foreign Sub 1) to persons who are not related to Foreign Sub 1 (the public), it was necessary to give a representation in the ruling letter that the fair market value of the Foreign Spinco 1 common shares was not, at any time, during the course of the series of transactions derived 10% or more from the new common shares of DC.
The mechanics for transferring the new common shares of DC indirectly to Foreign Spinco 1 (involving a three-party circular back scratching arrangement) did not dovetail at all well with the "permitted exchange" definition - but CRA was accommodating.
The letter contemplates that DC likely would have only one type of (net) property. This result was facilitated not only through reclassification of any net ordinary-course trade receivables, inventories and prepaids as business assets, but also by treating a leasehold interest that DC was subleasing to a third party as business property rather than investment property.
DC received a comfort letter in the spring respecting the application of the proposed debt dumping rules (relating to the fact that it was to transfer some foreign subsidiaries to TC, thereby giving rise to a deemed dividend). This point now appears to be addressed by the relief in draft s. 212.3(18)(a)(i) (respecting non-arm's length acquisitions of subject corporations.)
Neal Armstrong Summaries of 2012 Ruling 2011-0431101R3 under s. 55(1) - distribution, and permitted exchange; s. 55(3.1)(b)(i); s. 20(1)(c).
Abraham - Federal Court of Appeal finds that a decision of CRA that it knows to be legally incorrect is reasonable
A group of status Indian taxpayers applied to have their out-of-limitations-period income tax reassessed in order to conform to a Tax Court ruling (Boubard) that their income was exempt under s. 87 of the Indian Act. The Minister denied the application, reasoning that Boubard did not represent the "state of the law" at the time on s. 87. The Court of Appeal approved the Minister's "state of the law" methodology and found that the Minister's decision to deny relief was consistent with such methodology.
With respect, I think the Court of Appeal's conclusions are logically inconsistent. Justice Campell articulated the problem with the Minister's reasoning succinctly (at paras. 13 and 15 of the trial decision, 2011 FC 638):
Even though the decision under review was rendered pursuant to a discretionary power, it is important to note that the decision is based on findings of law, and, therefore, for the decision to be supported on judicial review, I find that the findings must be correct in law. ...
...Boubard is the law, and it is the law that applies to income received by Sagkeeng Band members who worked at the mill back to 1926 which is the date of the sale of the land upon which the mill was built.
The second paragraph is clearly correct - statutory interpretation is retrospective. The Minister's belief that court decisions affect "the state of the law" in a statutory context ignores the principle that statutory law is set down by Parliament and then discovered through interpretation rather than altered by judicial fiat.
Scott Armstrong. Summary of The Queen v. Abraham, 2012 FCA 266 under s. 152(4.2) and Indian Act - s. 87.
Pawlak - Tax Court finds that CRA must allow stale-dated ITC claims on late-filed GST/HST returns
The GST/HST "audit to net tax provision" (s. 296(2)) indicate that when the Minister assesses a registrant on audit, the Minister is required to take into account any unclaimed input tax credits that were available for the applicable reporting period in making that assessment. Webb J has extended this provision to also apply to the situation where a registrant has filed GST or HST returns beyond the normal limitations period for claiming ITCs for the reporting period in question (two or four years, depending on the type of registrant) - so that, in this case, the registrants, on filing returns very late, were entitled to ITCs well in excess of the taxable supplies made in the applicable reporting periods.
Neal Armstrong. Summary of Pawlak v. The Queen, 2012 TCC 355 under ETA s. 296(2).
Erdene tax disclosure points out potential trap on s. 86 reorganziations of junior mining companies
Erdene is spinning out a majority-owned public company subsidiary (APM) on a section 86 reorganziation. The Canadian tax disclosure points out that where Erdene shareholders' only shares only are flow-through shares, the section 86 rules will produce a capital gain equal to the full fair market value of the APM shares that are distributed to them, given the nil adjusted cost base of their flow-through shares.
Neal Armstrong. Summary of Erdene Circular under s. 86 reorganization spin-offs.
Spruce Credit Union - Tax Court finds that a distribution of needed corporate funds is not an avoidance transaction
General anti-avoidance rule cases usually turn on the question whether there was an abusive transaction. Quite unusually, the Tax Court has found that the distribution of funds of a deposit insurance corporation to its credit union shareholders in a manner that accessed the inter-corporate dividend deduction was not an avoidance transaction, so that Boyle J did not even have to get to the question of abuse.
CRA clearly was bothered by the fact that the dividend in question was paid out of tax-free assessments previously received by the deposit insurance corporation from its members - and the distribution of its funds could have been designed in a different way in order to avoid the "inappropriate" result of these amounts also being distributed free of tax. Nonetheless, the dividend payment itself (which Boyle J emphasized was the only transaction he had to consider) clearly had a primary non-tax purpose - they needed the money! Therefore: no avoidance transaction.
Neal Armstrong. Summaries of Spruce Credit Union v. The Queen, 2012 TCC 357 under s. 245(3) and s. 137.1(4)(c).
CRA forwards question about NYSE MKT's designated stock exchange status to Finance
CRA indicated that it would consult the Department of Finance as to whether Finance would add NYSE MKT to the list of designated stock exchanges (which is relevant, inter alia, for RRSP eligibility).
Scott Armstrong. Summary of 24 August 2012 T.I. 2012-0436031E5 under s. 262.
CRA characterizes referral fees as royalties rather than business profits
CRA considers that customer referral fees paid by a Canadian insurance broker to a US insurance broker likely should be characterized as payments for "information concerning... commercial... experience," so that the withholding tax that otherwise would apply under s. 212(1)(d)(ii) will be relieved by the Royalties Article of the Canada-US Income Tax Convention.
Neal Armstrong. Summary of 21 September 2012 T.I. 2012-0457951E5 under Treaties - Art. 12 and s. 212(1)(d)(ii).
CRA issues favourable ruling on ULC-to-S Corp PUC increase and distribution
CRA has issued a ruling that the anti-hybrid rule in the Canada-US treaty does not apply where a Canadian ULC (which is "sandwiched" between its S-Corp US parent and indirect LLC and qualified S subsidiaries) increases the paid-up capital of its shares, and then makes a cash distribution of that paid-up capital - so that the dividend is eligible for the Treaty-reduced rate of 5%.
Neal Armstrong. Summary of 2012 Ruling 2011-0430761R3 under Treaties - Art. 4.