News of Note
Calgary v. Canada - Supreme Court decision may suggest that not all the recipients of an exempt supply are necessarily required to satisfy the conditions for exemption
Email this ContentTransit procurement funding received by the City of Calgary from the Alberta government did not detract from the related transit assets being provided by the City as part and parcel of its supply of exempt municipal transit services to the Calgary public. Although it was arguable that the Province was also the "recipient" of this single supply, that did not detract from it being an exempt supply, given that the wording of the exemption did not require that the traveling public be the exclusive recipients of the supply.
This suggests that an exempt supply (or, presumably, a zero-rated supply) potentially can have multiple "recipients" (generally, the persons liable to pay the consideration), not all of whom satisfy the conditions for exemption. For example, if it is agreed that the fee of a professional firm for services rendered to a non-resident bank will be borne in part by the Canadian borrower, this case would suggest that all of the fee is zero-rated.
Neal Armstrong. Summary of Calgary v. Canada, 2012 SCC 20 under s. 123(1) -"supply" and "recipient."
First Nationwide - Character of a distribution from a Cayman company's share premium account as a dividend governed its UK tax treatment
The English Court of Appeal found that the characterization under Cayman law of a distribution out of a Cayman company's share premium account as a dividend governed its characterization for UK taxation purposes. This issue is becoming less important from a Canadian income tax perspective as draft s. 90(2) will now deem most capital distributions from foreign affiliates to be dividends.
Neal Armstrong. Summary of Revenue and Customs Commissioners v. First Nationwide, [2012] BTC 99, [2012] EWCA Civ 278 under s. 90(1) and General Concepts - Substance.
Benedict - Tax Court confirms the taxpayer's ability to subsequently use non-discretionary deductions which he did not fully claim when they arose
Woods J. confirmed that where a deduction in computing income (in this case, the terminal loss deduction under s. 20(16)) is mandatory ("shall be deducted") rather than elective ("there may be deducted"), the taxpayer's failure to claim the full amount of the deduction in the year it otherwise arose does not stop him from including the unclaimed amount in non-capital losses deducted by him in subsequent years.
Scott Armstrong. Summary of Benedict v. The Queen, 2012 TCC 174 under s. 20(16).
Pure Multi-Family REIT LP offering will permit RRSPs and Canadian individuals to invest in US real estate with similar tax results to investing in a Canadian REIT
As described in a preliminary prospectus, it is proposed that a newly-formed Canadian-listed LP will invest in a newly-formed US private REIT. As this will be the only asset, there will be no SIFT tax, and a portion of the cross-border distributions will be received for Canadian purposes as return-of-capital distributions.
The US REIT is targeted to be exempt from US corporate tax; and its distributions that are paid out to qualifying Canadian residents are targeted to be eligible for Treaty-reduced rates, e.g., 0% for RRSPs and 15% for most Canadian individuals. Assuming appropriate foreign tax credits for the latter, this produces the same or similar results to their investing in a Canadian REIT. Sounds good.
Neal Armstrong. See summary of 18 May 2012 Prelim. Prosp. for IPO of Pure Multi-Family REIT LP.
CRA confirms application of proportionate value approach to taxable Canadian property testing
Equity of a private corporation (or other entities such as a partnership) will be taxable Canadian property if at no time during the preceding 5 years has the equity of the entity derived more than 50% of its fair market value from Canadian real estate, resource or timber properties, timber resource properties or related options. At the recent International Fiscal Association meeting in Ottawa, CRA confirmed (through various examples, which were not provided when this position was previously announced at the Canadian Tax Foundation annual conference in the fall) that it will apply a proportionate value approach for the purposes of applying this test to subsidiaries (whose shares are taxable Canadian property) of the entity being tested - so that in effect mortgage debt is allocated across all classes of assets rather than being netted against the real estate to which it relates. CRA also indicated that the same approach will be applied in the case of subsidiary partnerships.
This contrasts with an earlier approach (based on a somewhat similar treaty test) where taxpayers generally were allowed to apply the netting approach if they so chose (see 5 September 2003 TI 2003-002967).
Neal Armstrong. Summary of 2012 IFA Roundtable Q.5 under s. 248(1) - "taxable Canadian property" [not yet published by CRA].
CRA is willing to prorate in characterizing recapture of depreciation
CRA accepts (with support from Bessemer Trust and Arnos) that recapture of depreciation has the same character (as business or property income) as the income from which the related capital cost allowance was deducted. CRA has now indicated that where in earlier years the CCA claims on a building were deducted in computing active business income (or, in this case, rental income from an associated corporation that was deemed to be active by s. 129(6)), and deducted from property income in later years, subsequent recapture of depreciation will be allocated between active business and property income on the same proportionate basis.
In the context of this example, this position seems to be generous given that when the building is sold it no longer is an active business asset.
Neal Armstrong. Summary of 9 May 2012 T.I. 2012-0440781E5 under s. 129(4).
Ford - English Queen's Bench Division finds that joint interest privilege can be available even if the advising lawyer's retainer was only with the corporation
Suppose that a tax lawyer is retained by a company to provide advice on matters that include the the tax treatment of executives or shareholders, e.g., advising on a stock option plan. Is the advice subject to joint interest privilege - so that the privilege in the legal opinion can be waived only if the corporation and each individual who received the advice agree to waive the privilege?
A UK court has set out a new five-part test for finding joint interest privilege in the situation where the solicitor's retainer was only with the corporation. This test essentially requires that every party involved - the solicitor and each individual recipient of the advice - understands that the advice is being given to the individuals in their own capacity rather than only on behalf of the corporation.
Scott Armstrong. Summary of R (Ford) v. Financial Services Authority, [2012] 1 All ER 1238, [2011] EWHC 2583 (QBD) under s. 232(1) - Solicitor-Client Privilege.
Davies - UK Supreme Court reiterates that Revenue has the power to assess otherwise than in accordance with the law
In the Davies decision discussed in the post below, the UK Supreme Court reiterated its position that the Revenue Commissioners have the authority to agree to not collect taxes which are owing by taxpayers at law, where this is done to further an objective of enhancing overall tax collections (see also Nuttall).
This position is contrary to Cohen, a Federal Court of Appeal decision which has not been considered by the Supreme Court of Canada.
Neal Armstrong. Summary of R (Davies) v. RCC, [2012] 1 All ER 1048, [2011] UKSC 47 under s. 152(1).
Davies - UK Supreme Court indicates that becoming a full-time employee elsewhere generally will result in a change in residence
The UK Supreme Court (formerly the House of Lords) has indicated that whenever an individual has left the UK to pursue full-time employment abroad, it is likely that he will be considered to have made a "distinct break in the pattern of his life in the United Kingdom," and thereby ceased to be ordinarily resident in the UK, notwithstanding that he or she may not have severed his or her family and social ties with the UK.
This position seems to be contrary to quite a number of Canadian lower court decisions respecting Canadian individuals who took a full-time job abroad but did not sever their Canadian personal ties (see, e.g., Glow, Mullen, Johnson, Gaudreau, Snow). The test of individual residency has not been considered by the Supreme Court of Canada since the Thomson case (which is based, in part, on the same English jurisprudence, e.g., Levene, as that underlying this decision in Davies). It is possible that the current Canadian judicial test, indicating that a requirement that an individual sever most of his or her social and family ties with Canada in order to cease to be a resident, is "pitch[ing] the requirement... at too high a level."
Neal Armstrong. Summary of R (Davies) v. RCC, [2012] 1 All ER 1048, [2011] UKSC 47 under s. 2(1).
Sheldon Intewash - A foundation with a sole trustee (which was "not at arm's length from itself") did not qualify as a public foundation
The Federal Court of Appeal found that, although the definition of "public foundation" in s. 149.1(1) does not explicitly require that a charitable foundation have multiple trustees (or directors or officers, as the case may be), this is implied by the wording - for example a single trustee cannot satisfy the requirement in the definition of dealing with the "other" trustees at arm's length (and "[m]oreover, a single trustee is not at arm's length from itself.")
This latter statement skirts a dubious proposition appearing in at least one CRA technical interpretation (see 23 May 1996 T.I. 5-960465) that it is possible for a corporation not to deal at arm's length with itself as a factual matter - so that on a deemed disposition and reacquisition of property by the corporation (in that interpretation, under s. 149(10) on becoming or ceasing to be Crown-exempt), provisions of the Act which apply to transactions between persons not dealing at arm's length, such as the 1/2 step-up rule in s. 13(7)(e), can apply. (S. 13(7)(e.1) implies, and common sense suggests, that this CRA interpretation is incorrect.)
Neal Armstrong. Summaries of Sheldon Intewash and Lynn Factor Charitable Foundation v. The Queen, 2012 FCA 136 under ITA s. 149.1, Interpretation Act s. 33(2), and Statutory Interpretation - Ordinary Meaning.