News of Note
Addy – High Court of Australia finds that imposing higher tax on Australian residents who were visa holders than on those who were not, violated a Treaty non-discrimination Article
Email this ContentThe taxpayer, who was a British citizen aged 23, came to Australia on a “working visa” for a 20-month stint, during which period she qualified as an Australian resident. A citizen and resident of Australia would have largely escaped income taxation on her modest income (mostly working as a waiter) due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of Pt. III of Sched. 7 of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.
The taxpayer, by virtue of her citizenship, was a UK rather than Australian national under the definition in the Australia-U.K. Treaty. That Treaty's non-discrimination clause (Art. 25) - also found in many of the Canadian treaties - provided:
Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.
The Court found the contention of the Commissioner, that “because s 29 of the Migration Act ensures that an Australian national cannot hold a working holiday visa, no comparison of the kind required by Art 25(1) is possible, and Art 25(1) is not engaged,” to be specious, stating:
[C]onsistent with the text, context, object and purpose of Art 25(1), the relevant comparator is the hypothetical taxpayer in the same circumstances apart from the criterion on which the claim of discriminatory taxation is based. The phrase "in the same circumstances" means in the same circumstances apart from those circumstances attached to the prohibited basis for discriminatory taxation. Here, that is visa status, a characteristic which depends on nationality – a person not being an Australian national – the very attribute protected by Art 25(1).
Accordingly, the taxpayer was shielded by Art. 25 from the more burdensome rate of tax imposed under the domestic backpacker tax provisions.
Neal Armstrong. Summary of Addy v Commissioner of Taxation [2021] HCA 34 under Treaties – Income Tax Conventions – Art. 25.
Income Tax Severed Letters 10 November 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A disproportionate UFT claim may eliminate Canadian tax otherwise arising on a s. 93(1) deemed dividend
Suppose that Canco would otherwise realize a capital gain on a liquidation and dissolution of a foreign subsidiary (FA) under s. 88(3). Rather than making a suppression election, it elects under s. 93(1) for the gain to be a dividend. There is plenty of taxable surplus (as a result of previously taxed FAPI) but, absent further planning, there is insufficient underlying foreign tax (UFT) to completely offset the dividend with a (proportionate) s. 113(1)(b) deduction.
That planning could be the claiming by it of a disproportionate amount of UFT with respect to the dividend received (per para. (b) of the “underlying foreign tax applicable” definition in Reg. 5907(1)) instead of a proportionate deduction under s. 113(1)(b). Thus, if there was sufficient UFT in respect of FA, Canco could claim additional UFT sufficient to create an additional deduction that completely eliminates the dividend income.
Neal Armstrong. Summary of Tu Vu, “Application of Disproportionate UFT Election,” Canadian Tax Focus, Vol. 11, No. 4, November 2021, p. 15 under Reg. 5907(1) - underlying foreign tax applicable – para. (b).
CRA indicates that a pipeline transaction can use an existing corporation rather than a Newco
In order to implement pipeline planning, the estate of an individual generally incorporates a new corporation ("Newco") to which it sells shares of a private corporation ("Target"), with or without a tax rollover, in consideration for shares of Newco or a note issued by Newco. Newco will remain in existence for at least one year before being merged with Target to form Amalco, whose assets are gradually used to redeem the shares or note.
CRA indicated that it did not have concerns with these transactions being varied by the estate selling the Target shares to an existing corporation in which it does not hold any shares and whose shares may be held by heirs of the deceased.
Neal Armstrong. Summaries of APFF Financial Strategies and Instruments Roundtable, Q.8 under s. 84(2) and s. 84.1(1).
CRA indicates that s. 7(1.3) does not preclude a gain arising on a short sale to fund an employee stock option exercise
An employee, who engages in a short sale transaction to finance the exercise of stock options on the shares of the individual’s employer, short sells identical shares borrowed from a third-party lender and uses the short sale proceeds to inter alia fund the option exercise – and then uses the shares acquired on exercise to cover the short position. The employee had previously made an s. 39(4) election and, at the time of the short sale, held other identical shares.
Regarding the shares that the employee acquired on exercise and promptly disposed of by delivering to the lender to cover the short position, s. 7(1.31) generally would oust the application of ACB averaging under s. 47(1), so that no gain would be realized on that disposition (assuming no value change subsequent to exercise).
However, s. 7(1.31) would not apply to the disposition of the shares that were borrowed and then sold, because such shares “would not have been acquired pursuant to an agreement referred to in subsection 7(1).” Accordingly, a gain would be realized on that initial disposition if the existing shareholding had a low ACB.
CRA also reiterated its position that:
Where, in a taxation year for which an election under subsection 39(4) applies, a taxpayer makes a short sale, the two dispositions of securities (both the one that occurs at the time of the short sale and the one that occurs subsequently when the borrower delivers securities to the lender to cover its short position) are deemed to be dispositions of capital property to the short seller.
Neal Armstrong. Summaries of APFF Financial Strategies and Instruments Roundtable, Q.7 under s. 7(1.31) and s. 39(4).
We have published 10 more translations of CRA interpretations
We have published 8 translations of CRA interpretation released between May 2011 and November 2006, which we translated some time ago but did not publish until now due to a filing mishap. Getting back on track, we have also published 2 translations of interpretations released in June 2006. Their descriptors and links appear below.
These are additions to our set of 1,796 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 15 1/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CIBC – Tax Court of Canada finds that s. 39(2) historically applied only to FX gains or losses on liabilities and foreign currency dispositions
CIBC realized an FX loss of C$126.4 million in 2007 when shares of a US subsidiary for which it had subscribed US$1 billion were redeemed for US$1 billion. Owen J rejected the CIBC position - that such loss was deemed by s. 39(2) to be a capital loss from foreign currency and therefore was excluded from the application of the s. 40(3.6) stop-loss rule, which applied only if the loss were viewed as having arisen from the disposition of the subsidiary’s shares – indicating that this position was inconsistent with a statement in the BMO case that: “[t]he gain or loss arising as a result of a disposition of a particular property was (and still is) determined under subsection 40(1)” before any application of s. 39(2).
Furthermore, Owen J disagreed with the CIBC position, stating:
[S]ubsection 39(2) was not required to address foreign currency fluctuations associated with acquisitions and dispositions of property other than foreign currency because subsection 40(1) read with due regard to the need to convert the amounts identified in that subsection into Canadian dollars already addressed such fluctuations and integrated them into the gain or loss computed under subsection 40(1).
… [T]his fact and the fact … that extending subsection 39(2) to dispositions of property other than foreign currency raises difficult issues together strongly suggest that Parliament did not intend that subsection 39(2) apply to dispositions of property other than foreign currency. …
In conclusion … subsection 39(2) as it read in 2007 was a stand-alone provision but Parliament did not intend that the subsection apply to dispositions of property other than foreign currency.
Neal Armstrong. Summary of Canadian Imperial Bank of Commerce v. The Queen, 2021 TCC 71 under s. 40(3.6), General Concepts – Stare Decisis and Statutory Interpretation – Prior Cases.
CRA finds that s. 104(18) can apply where an executor has discretion to defer the payment of income for the benefit of minor beneficiaries over an extended period
When it applies, s. 104(18) deems income of a resident trust to have become payable in a taxation year to a beneficiary under 21 years of age, even though the income was not actually paid or payable to the beneficiary in the year. For s. 104(18) to apply, the entitlement of the child to that beneficiary’s share of the unpaid income must be vested otherwise than because of the exercise by any person of, or the failure of any person to exercise, any discretionary power, and the right to which must not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years).
The will of a Quebec resident left all his property in equal shares, to his two children, aged 10 and 15. His will extended the estate administration until the children’s respective shares were distributed to them on attaining 25, with the will providing, in the meantime, that all income generated on each child’s share was to be used in the executor’s discretion for the support or maintenance of that child, with discretion to encroach on capital in the child’s favour.
CRA applied the principle that:
In the case of an estate, the conditions of subsection 104(18) may be satisfied even if the will contains provisions giving the executor discretion as to the timing of the payment of income or capital to a beneficiary under 21 years of age, provided that the executor has no discretion as to the determination of the amount of income to which such a beneficiary is entitled.
Accordingly, it appeared plausible to CRA that (subject to reviewing the details), s. 104(8) could apply.
Neal Armstrong. Summary of APFF Financial Strategies and Instruments Roundtable, Q.6 under s. 104(18).
CRA finds that when two spouses separate in the same co-owned house, one can make an HBP withdrawal to purchase the co-ownership interest of her spouse
Two spouses (Mr. X and Ms. Y), who had been living in a home co-owned by them, did not cease to be spouses when they started living separate and apart in the same house, as such status would not cease until divorce. Accordingly, in order for a withdrawal, made later in the same year of their having started to live separate and apart, from her RRSP to qualify as a home buyer plan (HBP) withdrawal, resort was necessary by Ms. Y to s. 146.01(2.1)(a), which would deem both her and Mr. X not to have owned an owner-occupied home 90 days after such separation date, so that Ms. Y would not be precluded from then making an HBP withdrawal by virtue of her spouse (Mr. X) in fact having been such an owner-occupant.
It would make no difference if the house was co-owned by the two spouses (or if they were common-law partners) – rather than owned only by Mr. X. Again, once they had been living separate and apart for 90 days, then s. 146.01(2.1)(a) would deem Ms. Y and her spouse not to have had an owner-occupied home, provided that she satisfied the additional condition (in 146.01(2.1)(a)(iii)(A)) that she will have disposed of her co-ownership interest by the end of the second calendar year following that of the HBP withdrawal. Furthermore, in light of s. 146.01(2.1)(b), the “qualifying home” acquired by Ms. Y for HBP purposes could be the co-ownership interest of her spouse.
Neal Armstrong. Summaries of 8 October 2021 APFF Financial Strategies and Instruments Roundtable, Q.5 under s. 146.01(1) - regular eligible amount – (f), s. 248(1) – common-law partner and s. 146.01(2.1)(a).
Income Tax Severed Letters 3 November 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.