News of Note
Resource Capital Fund – Australian decision suggests that many or most Canadian mining company shares may not be taxable Canadian property
Email this ContentThe Australian Federal Court found that even if a sale of shares of an Australian gold mining company had not been Treaty-exempt (as discussed in the post below), the company should not be considered to have more than 50% of its assets as Australian real property (i.e., its mining rights), so that the gain also would not have been taxable under the Australian equivalent of the taxable Canadian property rules.
This rested on a finding that one of the quite valuable non-real estate assets of the company was its "mining information." The logic was that if a purchaser acquired only the mining rights and not the drilling results and mining model, it would have to spend a huge sum on exploration in order to be able to commence production approximately four years later.
This case suggests that many or most Canadian mining company shares may not be taxable Canadian property – as well as not being real property under many or most of the applicable Treaties.
Neal Armstrong. Summary of Resource Capital Fund III LP v. Commissioner of Taxation, [2013] FCA 363 (Fed. Ct. of Austr.) under Treaties – Art. 13.
Resource Capital Fund – Australian Federal Court decision respects the flow-through character of a reverse hybrid
A Caymans LP with US-resident partners, which was treated for Australian purposes as a corporation and for US purposes as fiscally transparent, was assessed on a gain under the Australian equivalent of the taxable Canadian property rules. In nullifying the assessment, Edmonds J quoted comments in the OECD commentary that the source jurisdiction (Australia) should apply the provisions of the applicable (Australia-US) Treaty "as if the partners had earned the income directly," so that assessments instead should have been made of the (numerous) US-resident partners.
Neal Armstrong. Summary of Resource Capital Fund III LP v. Commissioner of Taxation, [2013] FCA 363 under Treaties – Art. 4.
MacDonald - Federal Court of Appeal affirms breadth of "in any manner whatever" in s. 84(2) anti-stripping rule
In a surplus-stripping transaction, a New Brunswick doctor sold a cash-rich corporation to his brother-in-law for a promissory note, with his resulting capital gain sheltered by unrelated capital losses - and with his brother-in-law extracting the corporate funds following a transfer of the corporation to a Newco he owned, and then paying off the promissory note.
Reversing the trial judge, Near JA found that s. 84(2) applied to treat the amounts the doctor received as a taxable dividend rather than a capital gain, notwithstanding that he was no longer a shareholder at the time he received the funds - and that this broad construction of the words "in any manner whatever" in s. 84(2) accorded with Merritt, Smythe, and RMM.
Scott Armstrong. Summary of MacDonald v. The Queen, 2013 FCA 110 under s. 84(2).
CRA indicates that, absent s. 216(4) elections, Canadian rents paid to a non-Canadian partnership are subject to full withholding notwithstanding Canadian partners
Consistently with earlier statements (see, for example, 30 October 1997 T.I. 971673), CRA considers that the full amount of rent paid by a Canadian tenant to a non-Canadian partnership is subject to Part XIII withholding notwithstanding that some of the partners are Canadian residents: there is no indication that an advance waiver can be obtained to reduce the Part XIII withholding.
The non-residents can elect under s. 216(4), so that an agent can collect the gross rents from the tenant and withhold non-resident tax at 25% on the net rental income. CRA states that although "the appointment of the agent… technically does not release the tenant from the requirement to withhold Part XIII tax," it accepts that the tenant normally is not required to withhold in this situation.
Neal Armstrong. Summaries of 27 March 2013 T.I. 2012-0450491E5 under ss. 212(13.1)(b) and 216(4).
CRA accepts that deeply subordinated intercompany debt is debt
As a preliminary step to a loss utilization transaction, LossCo will be rendered solvent by adding an option to convert its intercompany debt into an "A" Note and a deeply subordinated "B" Note (ranking behind the unsecured creditors), with the resulting B Note then being eliminated under a debt tuck-under and winding-up transaction (avoiding the debt forgiveness rules).
ProfitCo then will then utilize the LossCo non-capital losses by transferring depreciable assets to LossCo on a rollover basis for preferred shares, then redeeming the preferred shares a day later (on a non-rollover basis), thereby stepping up the UCC of the depreciable assets. There’s no superficial gain rule!
Neal Armstrong. Summary of 2012 Ruling 2012-0451431R3 under s. 111(1)(a).
Income Tax Severed Letters 1 May 2013
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Simon Fraser University - Tax Court finds that, for GST purposes, parking fines were not paid to the University as a consequence of contractual breach
The Minister assessed Simon Fraser University for failing to remit GST on fines it collected for campus parking violations, based inter alia on the position that the fines were payments made "as a consequence of the breach of...an agreement for the making of a taxable supply [of parking]," and thus caught by the quoted words of s. 182 of the Excise Tax Act.
C Miller J granted the university's appeal. The parking contract (contained on some signs) did not specify what the fines would be, and he found that they instead were imposed pursuant to a statutory power of the university. However, the case easily could have gone the other way given that, if the drivers had complied with the parking contact, there would have been no fines!
Scott Armstrong. Summary of Simon Fraser University v. The Queen, 2013 TCC 121 , under ETA s. 182.
CRA will not impose penalties for failure to issue T4As to non-commissioned independent contractors
The CRA policy appears to be that services fees (in excess of $500) paid to an independent contractor are required to be reported on a T4A - but no penalty will be assessed for failure to do so (where the fees are not commissions) until CRA has completed its review of this area.
Neal Armstrong. Summaries of 30 October 2012 Ontario CTF Round Table, Q. 10, 2012-0462961C6 under s. 153(1)(g) and s. 248(1) - office. Extract of RC4157 under s. 153(1)(g).
Is TFSA income eligible for Treaty benefits?
Art. XVIII, para. 7 of the Canada-U.S. Treaty indicates that a qualifying U.S. beneficiary of a Canadian exempt trust may elect to defer U.S. taxation on the trust income until distributed, if the trust was "operated exclusively to provide pension...benefits." Notwithstanding the "conservative" position of the big four accounting firms to the contrary, Nightingale and Turchen argue that a TFSA qualifies for this treatment. ("'Exclusively' is a bit of a loose term.")
Neal Armstrong. Summary of Kevyn Nightingale and David Turchen, "The US Tax Implications of a Tax-Free Savings Account", CCH Tax Topics, No. 2146, April 25, 2013, p.1 under Treaties - Art. 18.
Merger of GFO Connor, Clark fund into AUI fund gives unitholders choice of capital loss or rollover treatment
An unsuccessful Connor, Clark listed mutual fund trust (GFO) is being merged into another more successful Connor, Clark fund (AUI) under the s. 132.2 merger rules. GFO unitholders who want to realize a capital loss can redeem their units in advance.
The introduction of s. 132.2 followed IFIC lobbying to accommodate this style of portfolio mutual fund merger, although the s. 132.2 rule which emerged also accommodated income fund mergers. In a conversation of over a decade ago with the legislative drafter, he indicated that the rule was intended as a quick and dirty fix to provide a rollover and nothing much more, rather than providing a detailed merger code such as for a s. 87 amalgamation or 88(1) winding-up.
However, this type of "classic" portfolio fund merger tends to result in fewer anomalies than in a REIT or other income fund merger.
Neal Armstrong. Summary of Connor, Clark & Lunn Financial Opportunities Fund Circular under Mergers & Acquisitions – S. 132.2 Mergers – Portfolio Mutual Fund Mergers.