News of Note
CRA indicates that the Reg. 5903(5)(b) continuity rules does not permit a foreign affiliate parent to carry back FAPI losses generated by a wound-up foreign affiliate
Email this ContentPerhaps as a result of changes to the Iceland-U.S. Treaty, an Iceland “Sameignarfelag” (viewed by CRA as a partnership), which had been serving as a Finco to foreign affiliates in a Canadian multinational group was wound up into its non-resident partners (NR1 and NR2, wholly-owned by Canco2). The interaffiliate loans had been giving rise to active business income to NR1 and NR2 under s. 95(2)(a)(ii)(B) and, thus, were excluded property. Even if the time of disposition by NR1 and NR2 of their partnership interests on the partnership wind-up were viewed as the time of the final partnership distribution rather than the subsequent time of formal dissolution of the partnership, by that time the partnership had disposed of its loans, so that the partnership interests at that time no longer qualified as excluded property. (In this regard, CRA referred only to paras. (b), (d) and (e) of the excluded property definition, and ignored para. (c), which references property (including presumably a partnership interest) substantially all of the income from which is active business income including deemed s. 95(2)(a)(ii) active business income – but CRA likely would have come to the same conclusion if it had also examined para. (c) given that the s. 95(2)(a)(ii) source of income had disappeared by the disposition time.)
Since the partnership interests were not excluded property at the time of their disposition on the winding-up, their ACB was to be computed in Canadian dollars under Reg. 5908(10), i.e., essentially it became irrelevant that for most of its life, the Icelandic partnership held excluded property for which the calculating currency of its partners was to be used. This, in turn, meant that NR1 and NR2 realized a capital loss for FAPI purposes on the partnership wind-up. (The wind-up apparently occurred in pre-FACL days.)
The principal former partner was NR1. Canco2 transferred NR1 to the non-resident subsidiary (NR3) of its Canadian sister (Canco1 – which, like Canco2, was wholly-owned by the Canadian parent of this multinational group). NR1 was then wound-up into NR3.
CRA accepted that under Reg. 5903(5)(b), which deems the parent foreign affiliate on a designated liquidation and dissolution under s. 95(2)(e) to be the same corporation as and a continuation of the dissolved foreign affiliate for specified purposes, NR1 would be able for FAPI purposes to carry forward the loss of NR1, but that NR3 was precluded from carrying back that loss to prior taxation years.
Neal Armstrong. Summaries of 27 March 2018 Internal T.I. 2015-0592551I7 under s. 95(1) – excluded property, Reg. 5908(10), Reg. 5903(5)(b), s. 96 and s. 98(2).
Income Tax Severed Letters 26 September 2018
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CBS – Tax Court of Canada finds that CRA could repudiate a settlement based on factual inaccuracy only where that agreed fact had “no bearing to reality”
The Justice Department entered into a settlement agreement with the taxpayer in which it agreed to permit the taxpayer to carryforward an agreed portion of a $23.4M non-capital loss – and then promptly sought to repudiate the agreement on the basis that CRA had discovered that the non-capital loss in question did not exist, so that implementing the settlement would be contrary to law, which Galway and CIBC said was bad.
Lyons J quoted University Hill (“the Court will only interfere if the agreed‑upon facts clearly have no bearing to reality”) and then found that here “the agreed fact in the Minutes - that the $24,366,301 is available - is grounded in objective reality.” Accordingly, CRA was bound by the settlement agreement.
Neal Armstrong. Summary of CBS Canada Holdings Co. v. The Queen, 2018 TCC 188 under s. 169(3).
CRA acknowledges that it has discretion to waive its requirement for a vendor GST/HST registration number that is valid on the supply due date
CRA considers that in order for a supplier invoice to be a good invoice for input tax credit purposes of the recipient, the quoted registration number must be valid on the due date (or, in some circumstances, payment date) for the supply - except that CRA acknowledges that it has the discretion under ETA s. 169(5) to waive non-compliance by invoices where it is satisfied that there is or will be sufficient information evidencing the particulars of the supply and the tax payable.
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.15 under Input Tax Credit Information (GST/HST) Regulations, s. 3(b)(i).
CRA continues to apply Miedzi narrowly
CRA indicated that, notwithstanding Miedzi, it would not accord input tax credits to a parent, whose sole activity was ownership of Opco shares, for GST/HST on document preparation services supplied to its board, and on expenses related to discussions regarding the replacement of board members (i.e., a proxy fight?). This answer was provided before the release of draft ETA s. 186(1)(c), which generally would accord ITCs respecting most overhead expenses of a parent substantially all of whose property is shares or debts of an “operating corporation.”
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.14 under s. 186(1).
CRA effectively indicates that a builder who failed to self-assess GST on the construction of a rental complex may be better off lying in the grass
A non-registered corporation did not self-assess under ETA s. 191(3) on completing the construction of a triplex nor did it claim input tax credits. If it simply lay in the grass and did nothing until CRA discovered this situation on audit, s. 296(2.1), by virtue of requiring CRA, at the time of reassessing the corporation for undeclared GST, to retroactively allow any available but unclaimed rebates, would protect the corporation against any charges for interest (or late-filed return penalty under s. 280.1),) provided that the rebate claims for unclaimed ITCs and the s. 256.2 new rental residential property rebate put it in a net refund position. Would the answer change if the corporation did not wait for any audit and sent to CRA, in the same envelope, an s. 191(3) self-assessment filing and documentary support showing the availability of the offsetting rebate claims?
CRA indicated that this would be treated as the equivalent of a late-filed return and late rebate claims, rather than engaging the s. 296(2.1) netting rule, so that interest and penalties would apply. The correct procedure for accessing penalty and interest relief was to follow and comply with the voluntary disclosure program rules.
Thus, CRA effectively indicated that the corporation very well might be better off lying in the grass (and the extreme brevity of its response showed understandable discomfort with this point).
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.12 under ETA s. 296(2.1).
Borealis Geopower – Tax Court of Canada found that a taxpayer had “physically” received unearned government assistance
Although all the conditions for the receipt of government assistance had not yet been (and never were) satisfied, Campbell J found that the taxpayer had “physically acquired” the funds in question through depositing a cheque to a trust account of its own formation and thereafter disbursed the funds out of the account to fund its project without any practical hindrance by the government foundation in question (which appeared to have waived the condition referred to above). Accordingly, she found that the taxpayer had in fact “received” the assistance in question at that time for purpose of a grind to its SR&ED expenditures under s. 37(1)(d).
Neal Armstrong. Summary of Borealis Geopower Inc. v. The Queen, 2018 TCC 189 under s. 37(1)(d).
CRA notes that wire transfers can get lost because of intermediary banks cutting off essential characters
CRA observed that “intermediary banks often have a limit on the number of characters allowed in [a wire transfer] transaction, so this can result in some essential information being cut off” thereby resulting in difficulties allocating payments from non-residents and others to the correct account – and stated that “Currently, the best way to ensure that a wire transfer is successful is to also send a fax with the account information.”
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.13 under ETA s. 278(2).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretations released in February 2013, as fully translated by us.
These (and the other full-text translations covering all of the 657 French-language Interpretations released in the last 5 2/3 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. Next week is the "open" week for October.
594710 B.C. - Federal Court of Appeal finds that the allocation of partnership condo profits to a lossco that acquired its interest at year end without any economic risk was a vacuous transaction abusing ss. 96(1)(f), 103(1) and 160(1)
Income account treatment of the profits realized by a condo-project limited partnership was avoided through the corporate partners (the Partnercos) of the partnership paying safe income dividends (out of the realized but unallocated condo profits) to their respective Holdco shareholders through the payment of stock dividends of preferred shares followed by a redemption of those preferred shares – in turn, followed by a sale by the Holdcos of the Partnercos to a public company with substantial resource pools (Nuinsco). The income of the partnership for the year in which the condo sales had occurred was allocated to Nuinsco following the winding up into it of the Partnercos.
The sale of the Partnercos to Nuinsco two days before the partnership’s year end resulted in the deemed commencement of new taxation years for the Partnercos, which thereby permitted most of the income of the partnership to be allocated to Nuinsco as the principal partner at year end. In finding that such allocation was abusive for purposes of s. 245(4), Woods JA stated that it “divorc[ed] the economic consequences of the arrangement from the allocation of taxable income” given that “Nuinsco had virtually no economic interest or risk in the real estate development… except for a 10 percent ‘deal fee’.”
For similar reasons, she found that the allocation of most of the partnership income to Nuinsco also was an abuse of s. 103(1), and went on to state that “the Minister may not have had to resort to the GAAR in this case because subsection 103(1) appears to apply on its own.”
The taxpayer in this case was not any of the Partnercos, but a Holdco for one of the Partnercos that had received the stock dividend in question. Woods JA found that this stock dividend, when viewed in combination with the subsequent immediate redemption of the stock dividend shares, had the same effect as a cash dividend and, therefore effected a transfer of property to the Holdco for no consideration for purposes of s. 160. Accordingly, from a GAAR perspective, the transactions – which permitted an allocation of income to Nuinsco and the resulting avoidance of any tax liability that could flow through to the Holdco under s. 160 - also amounted to an abuse of s. 160.
Neal Armstrong. Summaries of Canada v. 594710 British Columbia Ltd., 2018 FCA 166 under s. 245(4), s. 103(1), s. 160(1) and s. 152(8).