News of Note
A US enterprise arguably can acquire a Canadian services PE by providing services only to related Canadian enterprises
Email this ContentThe US Joint Committee on Taxation stated that the services PE concept in the Canada-U.S. Treaty “only applies to services provided by the enterprise to third parties and not to services provided to that enterprise (i.e. inter-company services)." In 2009-0319441C6, CRA rejected the proposition that this means that there can be no services PE where services are only rendered between related parties. The CRA position might correct on the basis that the Joint Committee report was merely indicating “that services provided to the nonresident enterprise by its affiliates do not result in a PE to the enterprise to whom the services are provided,” as contrasted to excluding services provided by a non-resident enterprise to related parties.
Neal Armstrong. Summary of Abraham Leitner and Peter Glicklich, "Uncertainty Remains Under the Services PE Provision in the U.S.-Canada Income Tax Treaty," Tax Management International Journal, 2015, p. 784 under Treaties – Art. 5.
Emotion Picture Studios – Tax Court of Canada finds that “research” to figure out how to maximize Google search rankings was not SR&ED
C Miller J found that “experiments” engaged in to figure out how to improve Google search rankings for websites were not SR&ED, stating:
I fail to see how it is a scientific advancement to figure this out. It strikes me more of solving an equation someone has already solved, rather than coming up with a new proof.
Neal Armstrong. Summary of Emotion Picture Studios Inc. v. The Queen, 2015 TCC 323, under s. 248(1) - scientific research & experimental development.
CRA may characterize investment management services provided to a pension plan as supplied to the employer, and on-supplied to the plan
A service which in reality is provided by A to C may be viewed by CRA as a double supply made by A to B, and by B to C, if it is B who retained the services of A. For example, where an employer retains an investment manager for the company pension plan, and the pension plan pays the manager directly, CRA considers there to be a double supply of a service from the manager to the employer, and by the employer to the plan, so that the employer generally may claim an ITC for the HST payable to the manager, and is required to collect a corresponding HST amount from the plan. (This is broadly consistent with Caithkin, respecting a double supply of foster care services.)
Neal Armstrong. Summary of B-032 “Expenses Related to Pension Plans” 17 November 2015 under ETA s. 123(1) - recipient.
The Honeywell cash purchase price for COM DEV is reduced by capital gains tax realized by COM DEV on spinning out a subsidiary (exactEarth)
It is proposed that COM DEV spin-off its 73% interest in a subsidiary (exactEarth) under a s. 86 reorg and that its common shares then be acquired by an indirect Canadian sub of Honeywell International for an initial cash payment of $5.125 per common share plus a second “Contingent Payment Amount” approximately two weeks following the closing date of up to $0.125 per Common Share (based on whether the exactEarth shares have appreciated over a pegged figure in post-closing trading on the TSX.)
The rationale for the contingent payment is that Honeywell is only willing to pay the last $10 million of the purchase price for the COM DEV shares if the fair market value of the exactEarth Shares distributed by COM DEV on the s. 86 reorg (as evidenced by their trading prices on the TSX for the first five trading days after the Arrangement) does not exceed $7.15 per share (which is already a premium over the $6.50 per share at which COM DEV and the minority exactEarth shareholder will have subscribed for exactEarth shares shortly before the Arrangement.) To the extent that the market values exactEarth higher than this, the second cash payment by Honeywell to the former COM DEV shareholders will be reduced by the capital gains tax payable by COM DEV on that appreciation (at an assumed rate of 13%).
Neal Armstrong. Summary of COM DEV Circular unde Mergers & Acquisitions – Cross-Border Acquisitions – Inbound - Canadian Buyco.
Blank – Australian Full Court finds that phantom units were not taxable when they vested
In 1994, a non-resident executive was granted units which entitled him, on retirement, to receive payments calculated by reference to the consolidated profits of Glencore International AG, a Swiss corporation. He retired at the end of 2006, and became entitled to receive U.S.$160 million in instalments commencing in July 2007. He and Glencore then agreed (pursuant to an agreement which was not executed until January 2008) that the first four instalments would be paid by Glencore to the Swiss taxing authority (the FTA) in satisfaction of Swiss withholding tax on the U.S.$160 million. This remittance occurred in 2008.
The relevant Australian tax law provided that, in the case of a reward for personal service, the income “derived” by the taxpayer is the “amount…actually received in the year in question” (Brent, 125 CLR 418, at para. 13), and a deeming provision specified that “you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."
The Full Court of the Australian Federal Court held that although two of the four instalments were due to him in 2007, they were not income to him until 2008 when they were paid on his behalf to the FTA. This is consistent with the proposition that phantom units are not constructively received when they vest but no exercise occurs (cf. Bianchini).
The taxpayer also unsuccessfully argued that a pro rata portion of the U.S.$160 million was exempt based on the fact that for roughly his first eight years of service after the grant of the units, he had been a non-resident employed outside Australia, and came to Australia to work for an Australian sub (and became an Australian resident) only in 2002. The Court stated:
[T]he Amount was incapable of apportionment as between earnings from foreign service, on the one hand, and earnings not from foreign service on the other because the agreed method of calculating that Amount did not allow for that distinction to be made. The Amount was incapable of being calculated on a per diem basis… .
If analogous facts arose in applying s. 115(1)(a)(i) to a lump sum paid to a non-resident who had worked both inside and outside Canada where apportionment on a rational basis was impossible, would one conclude that the amount was 100% exempt or 100% taxable?
Neal Armstrong. Summaries of Blank v. Commissioner of Taxation, [2015] FCAFC 154 under s. 6(1)(a) and s. 115(1)(a)(i).
Proposed Sprott Physical Gold Trust acquisition of Central Goldtrust under s. 132.2 merger uses bonus units and supplants Central GoldTrust proposal to convert to ETF
In May, Sprott made an offer that would have entailed an acquisition by Sprott Physical Gold Trust of all the units of Central GoldTrust, with the GoldTrust unitholders being provided a choice between a taxable exchange of their units for Sprott units, or participating in a s. 132.2 rollover merger. GoldTrust essentially is a closed-end fund, although its units provide what in economic substance is a somewhat illusory retraction right to qualify it as an open-end trust for Canadian tax purposes (so that its units traded at a significant discount to NAV before the Sprott offer.) The trustees of GoldTrust resisted this offer, and early this month issued a Circular in which they proposed that GoldTrust be converted into an ETF whose unit terms would provide that unitholders whose units’ value at least equalled that of a (London good delivery) gold bar could redeem their units for gold bullion plus top-up cash (and with all unitholders having a right to redeem units for cash at a 5% discount to NAV, so that the trust would be a unit trust under s. 108(2)(a)). In the meantime, a non-discounted cash redemption right would also be added to the units to be available until the ETF conversion occurred.
The Canadian tax disclosure stated that GoldTrust would report any gains realized on its gold bullion, as a result of honouring redemption demands, as capital gains, and indicated uncertainty as to whether, if CRA at a subsequent juncture assessed on the basis that such gains were realized on income account, the additional trust income could be pushed out to the resident unitholders (and that there would be Part XIII tax exposure where the redeemed units instead were those of non-residents). The U.S. tax disclosure was non-commital as to whether the various proposed amendments should be treated as a non-taxable amendment of the terms of the Units or as a deemed exchange of the existing Units for new amended Units qualifying as a tax-free recapitalization and/or as a tax-free stock exchange for Code purposes – and had extensive disclosure relating to GoldTrust’s status as a PFIC.
On Christmas eve, GoldTrust issued a further Circular indicating that, as a result of proxies given to Sprott under its bid, Sprott had replaced essentially all the GotdTrust trustees and requisitioned a GoldTrust unitholders meeting to approve the merger with the Sprott Physical Gold Trust (which Sprott now has the votes to get approved as a result of getting those proxies). The merger would essentially occur the same as before except for an interesting twist (that arose during the bidding process) that Sprott would initially contribute some "bonus consideration" Sprott Physical Gold Trust units to GoldTrust, which then would be immediately distributed to the GoldTrust unitholders.
Neal Armstrong. Summary of Sprott Physical Gold Trust offer for Central Goldtrust units under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – Bullion Fund Mergers, summary of Central Goldtrust Circular for ETF Conversion under Other – Conversions – Closed-End To Open-Ended Funds and summary of Central Goldtrust Circular for merger with Sprott Physical Gold Trust under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – Bullion Fund Mergers.
Income Tax Severed Letters 30 December 2015
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that a federally incorporated charity is resident for HST rebate purposes where its office is
ETA s. 132.1(3) and s. 2(2) of the New Harmonized Value-added Tax System Regulations, No. 2 provide that a charity is deemed to have a permanent establishment in a province if a place in that province would be a permanent establishment for income tax purposes if the charity were a corporation and its activities were a business for income tax purposes. Although this test could give rise to metaphysical difficulties, CRA had no difficulty in ruling that a federally-incorporated charity which managed its activities out of a single office in “Province 1” was resident for HST rebate purposes in Province 1.
Neal Armstrong. Summary of 23 June 2015 Interpretation 144489 under ETA s. 132.1(3).
CRA considers discounts on purchases by members of a public sector body to be “insignificant” for GST exemption purposes if less than 30% of membership fees
Membership fees in a public sector body can be GST-exempt even where the member receives discounts on purchases made from the body provided that their total value is “insignificant” relative to the membership fee, which CRA interprets as being less than 30%.
Neal Armstrong. Summary of 2 June 2015 Ruling 169081 under ETA Sched. V, Pt. VI, s. 17(e).
CRA acknowledges that what is “nominal property” for purposes of the ETA s. 156 election can be determined on a relative basis
The test of who is a “qualifying member” eligible to make an ETA s. 156 election for intra-group supplies to occur at deemed nil consideration references whether substantially all the registrant’s property (other than financial instruments and “property having a nominal value”) has been acquired for consumption, use or supply exclusively in the course of its commercial activities (para. (c)(i)) or, if it has no such property, instead references the services it supplies (para. (c)(ii)) or its reasonably expected prospective supplies and purchases (para. (c)(iii)).
CRA stated that generally this test “will be made with reference to the value of the property and its significance, relative to the commercial activity in question,” so that (to use the extreme example cagily provided by CRA) a $300 computer would be nominal relative to a business with a prospective $1 billion in assets.
Neal Armstrong. Summary of 24 April 2015 Interpretation 166609 under ETA s. 156(1) – qualifying member.