News of Note

An individual did not sell his shares of an operating company (Groupe AST) directly to a third-party purchaser. Instead he rolled his shares into a holding company (276), following which some internal transactions occurred in which the adjusted cost base of the Groupe AST shares was stepped up to fair market value - including a non-rollover drop-down of those shares to a subsidiary (9144) in exchange for high-basis common shares - with 276 realized corresponding capital gains. The Groupe AST shares were then sold to the purchaser at no additional gain.

276 then engaged in “value shift” transactions of the same general type as were struck down under GAAR in Triad Gestco and 1207192, i.e., a stock dividend of high-low preferred shares was paid on the high-ACB common shares that 276 held in 9144, thereby rendering those common shares almost worthless, and then the capital loss was realized by selling those common shares for $1 to a corporation owned by the son of 276’s shareholder.

Although, unlike Triad Gestco and 1207192, the capital gains – to be offset by the value-shift loss – were realized in internal transactions, this was not a relevant difference. In rejecting the taxpayer’s submission that there was no avoidance transaction as each transaction had an estate freezing objective, Paris J stated that although he accepted “that the global objective of the series was to effect an estate freeze,” one of the transactions was unnecessary from an estate freezing perspective.

Neal Armstrong. Summary of 2763478 Canada Inc. v. The Queen, 2017 CCI 98 under s. 245(3) and s. 245(4).

Art. XXIX(5) of the Canada-U.S. Treaty contemplates the Canadian-resident shareholder of an S Corp. agreeing with the Canadian competent authority that the income of the S Corp will effectively be attributed to him or her as foreign accrual property income, so that the U.S. taxes payable by that shareholder can be eligible for a foreign tax credit. CRA indicated that since the template S-Corp. agreements provide that the FAPI that is so attributed is the income of the S Corp. computed under the Code, such income will include the income of a qualified subchapter S Corp. subsidiary of the S Corp – so that there is no need for the Canadian shareholder to enter into a separate S-Corp. agreement respecting the QSSS.

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.9 under Treaties – Art. 29.

A single-member disregarded U.S. limited liability company (“SMLLC”), whose member is a resident of Canada, is factually resident in Canada and, thus subject to Part I tax, whereas U.S. source income (e.g., business income from a U.S. permanent establishment) would also be subject to U.S. income tax in the hands of the member, without the SMLLC being entitled to claim any foreign tax credit for such U.S. tax paid by its member.

Notwithstanding that from the U.S. perspective, the member is double-taxed on the same U.S. source income, CRA did not consider that there would be any potential redress under Art. 26(1) of the Treaty (re taxation not according with the Treaty).

If the member was a dual resident or U.S. citizen, and the LLC elected to be taxed as an S-Corp after electing to be taxable as a C-Corp, it would be subject to pass-through taxation for U.S. income tax purposes like a typical disregarded US LLC. However, the member might be able to request competent authority assistance pursuant to Art. 29(5).

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.8 under s. 125(1) and Treaties Art. 26 and Art. 29.

CRA indicated that as a power of attorney is an “office” for GST/HST purposes (which effectively is treated the same as employment for GST/HST purposes), an individual who charged for performing pursuant to a power of attorney was not engaged in a commercial activity, so that no GST/HST was exigible.

Neal Armstrong. Summary of 13 April 2017 Interpretation 162819 under ETA, s. 123(1) – office.