News of Note
CRA finds that payment of the Part XIII tax on a phantom s. 15(2) net benefit arising from an FX fluctuation was not taxable under s. 56(2)
Email this ContentA partnership with Canadian members made a foreign-currency loan to a non-resident sister and then, when it was discovered that this gave rise to Part XIII tax under s. 15(2), the loan was repaid - but without there being a full off-setting deduction under s. 227(6.1) because the Canadian dollar had appreciated in the interim.
In these circumstances, CRA found that the payment by the Partnership of the Part XIII tax on the net benefit did not give rise to a taxable benefit (which would have been subject to Part XIII tax under s. 214(3)(a)) to the non-resident sister.
Neal Armstrong. Summary of 20 November 2012 Memorandum 2011-0416761I7 under s. 56(2).
CRA confirms that US taxes paid by a US Holdco on the earnings of its LLC subsidiaries qualified as FAT if those earnings were distributed to it
A decade-old internal interpretation, which was released on Wednesday, dealt with a US subsidiary (US Holdco) of Canco, which paid US taxes on the income (which was FAPI to Canco) of its LLC subsidiaries. CRA confirmed that such US taxes qualified as foreign accrual tax to the extent that US Holdco received a distribution of those earnings from the LLCs , i.e., such US taxes then qualified as being "in respect of a dividend received from the [LLCs]."
The making of tax compensation payments by the LLCs to US Holdco was irrelevant: Reg. 5907(1.3) did not apply.
Neal Armstrong. Summaries of 8 April 2004 Memorandum 2003-0037291I7 under s. 95(1) - foreign accrual tax and Regulation 5907(1.3).
CRA confirms application of draft s. 87(8.2) to downstream merger
CRA found that draft s. 87(8.2) applied to a "downstream merger" of an immediate foreign subsidiary (FA1) of Canco into FA1's subsidiary (FA2), with FA2 as the survivor. CRA characterized the FA2 shares received by Canco on the merger as consideration for Canco's cancelled shares of FA1, so that s. 87(4)(a) deemed Canco to have disposed of its shares of FA1 for their adjusted cost base, rather than draft para. (n) of the definition of "disposition" applying to deem there to have been no disposition of those FA1 shares.
Neal Armstrong. Summary of 4 March 2013 Memorandum 2012-0449371I7 under s. 87(8.2).
Connor Homes - Federal Court of Appeal finds that the intent of the parties is the first issue to address in determining whether there is an employment relationship
In determining whether an individual is an employee or independent contractor, the court must first determine whether the parties in fact intended their relationship to be that of employer-employee, and only then turn to determining whether that intent is sustained by objective reality (e.g., by applying the four Wiebe tests - see IC 75-6R2, para. 66).
Although the Tax Court erroneously went through these two steps in the reverse order, this was not a sufficient basis for reversing its finding that three individuals performing child and youth care, or supervisory, services for operators of foster homes and group homes were employees: notwithstanding that the parties' subjective intent (as stated in their contracts) was to be independent contractors, this was not consistent with the "significant degree of control the [operators] exerted over the three individuals in the execution of their tasks, the limits on their ability to profit, and the absence of any significant financial risks or investments...."
Neal Armstrong. Summary of 1392644 Ontario Inc. (Connor Homes) v. MNR, 2013 FCA 85 under s. 5(1).
Income Tax Severed Letters 27 March 2013
This morning's release of 15 letters from the Income Tax Rulings Directorate is now available for your viewing.
Coeur d’Alene uses cashless exercise warrants in acquisition of Orko Silver
A B.C. subsidiary of Coeur d’Alene is acquiring Orko Silver under a plan of arrangement for consideration including warrants to acquire Coeur d’Alene shares. As the issuance of shares on exercise of the warrants would not be exempt from registration requirements under the 1933 U.S. Securities Act, the warrants have a cashless exercise feature, i.e., the holder on "exercise" is issued Coeur d’Alene shares having a value equal to the in-the-money value of the warrants. As no exchangeable shares are offered, there will be no Canadian rollover.
Orko will then be merged under the plan of arrangement with the Coeur d’Alene subsidiary (now its parent), with Orko as the sole surviving corporation. CRA has ruled that this type of merger (i.e., with the subsidiary as the survivor) qualifies under s. 87 as a good amalgamation (2010-0355941R3).
Neal Armstrong. Summary of Orko Silver Circular under Cross-Border Acquisitions - Inbound – Other.
Melcor will defer capital gain on excess mortgage debt, on the formation of Melcor REIT, by having the REIT subsidiary LP issue tracking preferred LP units
Melcor will be transferring most of its rental properties to a new Canadian REIT (Melcor REIT) for consideration that includes exchangeable units of a subsidiary LP of the REIT and the assumption of a portion of its mortgage debt.
The assumption of all the mortgage debt would have triggered a capital gain to Melcor. Instead, Melcor is retaining a portion of the mortgage debt, and taking back Class C LP units from the subsidiary LP which will pay preferred distributions sufficient for it to service the retained debt, with the partnership providing a secured guarantee of the retained debt – and also indemnifying Melcor if Melcor’s deferred tax is triggered prematurely as a result of a sale of the related properties.
Neal Armstrong. Summary of Circular for IPO of Melcor REIT under Domestic REIT Offerings.
WPT Industrial REIT will use the Milestone dual-REIT structure
The IPO of WPT Industrial REIT contemplates that it will be a Canadian REIT and a U.S. corporation under the Code s. 7874 anti-inversion rules. However, it will elect to also be a U.S. REIT so as to avoid U.S. corporate income tax. Although there are a few commercial differences (e.g., U.S. dollar distributions, and a U.S. manager) this is essentially the same dual-REIT structure as in the Milestone Apartments REIT offering.
Neal Armstrong. Summary of WPT Industrial REIT offering under Cross-Border REITs.
Lipson - Ontario Court of Appeal finds that a CRA reassessment may not have commenced the limitations period for an allegedly negligent tax opinion
A law firm provided a tax opinion that was used to promote leveraged donations, which CRA disallowed. The plaintiff sought to certify a class action against the law firm.
The motion judge declined to certify on the basis that the applicable two-year limitations period had expired - as it started running in 2004 when CRA proposed to disallow the credits, so that the negligence action was barred when it was launched in 2009.
The Court of Appeal found that it was not clear that the limitations period had commenced in 2004. Notice of a "potential problem" with the taxpayers' claimed charitable tax credits was not knowledge of a negligence claim. There was potential merit in the plaintiff's allegation that they did not have that knowledge until two representative test cases were settled in 2008 in the Crown's favour.
Scott Armstrong. Summary of Lipson v. Cassels Brock & Blackwell LLP, 2013 ONCA 165, rev'g 2012 DTC 5013 [at 6604], 2011 ONSC 6724 under General Concepts - Negligence and Fiduciary Duty.
Site Announcement - Data Centre Outages
Our hosting provider's data centre had a power outage that took down Tax Interpretations for just over 12 hours. Service has been restored, but subsequent outages may occur before the source of the problem is properly addressed. We apologize for the inconvenience.
Update - the power problem has been resolved.