News of Note
Income Tax Severed Letters 13 February 2013
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA acknowledges partnership interest income anomaly in HST/GST de minimis financial institution rules
CRA has released a Memorandum (17.7) on the de minimis financial institution rules (which, in very broad brush terms, deem an entity to be a financial institution for HST/GST purposes if it had more than $10M in interest or dividend income, other than from related corporations, in the preceding year). One of the additional observations made in this memorandum compared to the memorandum which it replaces (700-4) is that it acknowledges that interest paid by a partnership to a partner (including within a non-arm's length grouping of enterprises) is included in the $10M revenue test for these purposes.
Neal Armstrong. Summary of Memorandum (New Series) 17.7 De Minimis Financial Institutions under ETA - s. 149(1)(b).
FP Newspapers - Tax Court finds that a limited partner could not claim ITCs for costs incurred in respect of its partnership investment
A partner who incurs HST or GST costs out of its own pocket but "as a member of the partnership" potentially can claim input tax credits if the partnership is engaged in commercial activity. A decision of Pizzitelli J. may have established the proposition that it is not possible for a limited partner to rely on this rule - on the basis that, as a limited partner, it is not supposed to be incurring costs in respect of the partnership business.
Neal Armstrong. Summary of FP Newspapers Inc. v. The Queen, 2013 TCC 44 under ETA - s. 272.1(2) and 141(3).
CRA requires a minimum of 50% margin as security for exit tax (and resists partial pledges)
In the situation where an individual leaving Canada wishes to post security with CRA for the exit tax that otherwise would be payable on the deemed disposition of the individual's Class A and B shares of a CCPC, CRA will require that the shares of both classes be posted as security - unless for some reason it is possible to furnish only shares of one of the classes, in which case CRA will accept the shares of the one class if their value is at least twice that of the exit tax.
Neal Armstrong. Summary of 5 October 2012 APFF Round Table, 2012-0454231C6 F under s. 220(4.5).
Brookfield Asset Management is converting synthetically into a Bermuda LP
Brookfield Asset Management is transferring substantially all of its commercial real estate portfolio property to a Bermuda limited partnership (but presumably on a full or partial rollover basis as the GP starts out as an Alberta ULC before becoming a Bermuda company). It will then transfer approximately a 10% interest in that partnership (the Property Partnership) to another Bermuda limited partnership (Brookfield Property Partners L.P., or "BPP LP"), with its approximate 89% non-voting LP interest in the Property Partnership being exchangeable (albeit on non-standard terms) into BPP LP units.
It will then distribute that 10% interest in BPP LP to its shareholders as a special dividend (none of that PUC distribution stuff), and will fund withholding tax applicable to non-resident registered shareholders by purchasing the units withheld by it (valued for these and other purposes based on the 5-day post-closing VWAP). BPP LP and the Property Partnership are not expected to be subject to SIFT taxation based on their targeted non-Canadian residence.
Redeemable preferred shares (with structured voting rights) received by Brookfield Asset Management in an underlying Canadian corporation amount to only $1.25 billion, some of which will be redeemed in short order, so that there is no significant estate freezing-style structuring going on.
The objective may be for the assets of Brookfield Asset Management to now be largely exchangeable into an entity that trades somewhat as a flow-through entity. Over time, the 90% interest of Brookfield Asset Management in the Property Partnership is expected to be diluted.
Neal Armstrong. Summary of Circular for Brookfield Property Partners L.P. under Foreign Asset Funds and LPs (see also earlier June 2012 version).
CRA will continue "pour le moment" to treat partnership activities as fiscally transparent notwithstanding recent Quebec decisions
Decisions such as Robinson, Randall and Sandhu have established that partners are considered for purposes of the Act to be carrying on the partnership activities (although s. 253.1 overrides this in some contexts) - so that if the sole asset of a corporation is an interest in a partnership carrying on an active business, that partner will be considered to be carrying on an active business.
CRA was asked whether this has been changed by two Quebec Court of Appeal decisions which indicate that a partnership possesses a patrimony separate from its partners. CRA indicated that trying to apply this concept to the Act would raise numerous questions. For the time being, it will continue to treat a partnership as a look through entity for purposes of attributing its activities to the partners.
Neal Armstrong. Summary of 5 October 2012 APFF Round Table, Q. 6, 2012-0453991C6 F under s. 248(1) - small business corporation.
CRA does not have a policy to reduce a s. 160 assessment of a transferee of a Quebec tax debtor so as to avoid double taxation
Quebec has the equivalent of s. 160, so that a distribution of property worth, say, $100,000 by a Quebec tax debtor to a non-arm's length transferee can result in assessments of the transferee for $100,000 of tax by each jurisdiction. CRA stated (presumably on the basis of the Cohen and Galway line of cases) that it does not have the authority to reduce its s. 160 assessment by the amount of the equivalent Quebec assessment.
A comparable situation of double taxation of a transferee under s. 160 and the HST/GST equivalent (ETA s. 325) will be avoided if the GST or HST assessment is issued second, which CRA will try to do.
Neal Armstrong. Summary of 5 October 2012 APFF Round Table, Q. 27, 2012-0454241C6 F under s. 160(2).
Roud Estate - Tax Court finds misrepresentation attributable to neglect, and recommends fairness relief on the same facts
Neither a taxpayer nor an individual holding her power of attorney were aware that the taxpayer had realized a capital gain when her shares in a corporation were exchanged for trust units following the corporation's conversion to an income trust, and their failure to report the gain was a misrepresentation that entitled the Minister to assess beyond the limitations period. However, Boyle J. also stated that the situation was a "compelling case for the Minister to consider relief of at least some of the interest" the taxpayer owed.
Scott Armstrong. Summary of Roud Estate v. The Queen, 2013 TCC 36, under s. 152(4)(a)(i).
CRA indicates that a loss likely cannot be recognized on writing-down shares of a lossco with no assets or liabilities
An individual holding a former small business corporation with no assets or liabilities but with significant non-capital losses ("Lossco") claims an allowable business investment loss under ss. 50(1)(b)(iii) and 39(1)(c), and then transfers Lossco to a corporation owned by his father (i.e., a related but unaffiliated company).
Before grudgingly intimating that this loss transfer transaction would appear to work, CRA indicated that the individual likely did not qualify for an ABIL (so that only an ordinary capital loss was realized on the subsequent transfer) for two reasons: Lossco was not insolvent (it had no liabilities to put it under water); and its tax losses likely gave its shares a positive value.
Neal Armstrong. Summaries of 5 October 2012 APFF Round Table, Q. 11, 2012-0454061C6 F under ss. 50(1) and 111(1)(a).
CRA's policy is to vacate the provincial assessment where a federal assessment is directed to be vacated by the Tax Court
CRA has stated that it is "strictly true" that the Tax Court lacks jurisdiction over provincial tax matters. However, following a successful taxpayer appeal of a federal assessment in the Tax Court, CRA will vacate (or reduce) the provincial tax assessment to match the vacating (or reduction) of the federal assessment when authorized to do so under a Tax Collection Agreement. For example, director's liability in s. 227.1 of the Income Tax Act has mirrored provisions in the statutes of each Agreeing Province.
Scott Armstrong. Summary of 9 August 2012 T.I. 2012-0446051E5 under s. 227.1(1).