News of Note
Damis Properties – Tax Court of Canada finds that s. 160 and GAAR did not apply to a sale of companies holding cash sales proceeds to a purchaser who purported to eliminate the tax liability
Email this ContentFive corporate taxpayers sought to increase their after-tax return from the sale by their farm partnerships of the farm by transferring their partnership interests under s. 85(1) to newly-formed subsidiaries, to which the partnerships then allocated the gains realized from the farm sale, then selling their subsidiaries to a purchaser (WTC) with a mystery plan for eliminating the tax liabilities of each subsidiary. (It emerged much later that this plan was simply to make CCA claims on software transferred post-closing into the purchased subsidiaries - which Owen J found did not satisfy the income - producing purpose test in Reg. 1102(1)(c).) The sale price for the shares allowed the taxpayers to effectively share in a portion of the purported elimination of the tax liabilities. WTC then used the applicable portion of the cash proceeds from the sale still resting in the subsidiaries (the “Property”) to pay the purchase price.
Ten years later, CRA assessed the taxpayers under s. 160(1).
Owen, J agreed that the transactions entailed an indirect transfer of property from the subsidiaries to the taxpayers, stating that “the participation of WTC in the indirect transfer of the Property does not alter the basic fact that the Property that was originally in the subsidiaries ended up in the hands of the Appellants.” However, he found that at the relevant time (which he concluded was the time at which the indirect Property-transfer steps were completed, namely, the payment of the cash purchase price by WTC), the taxpayers were dealing at arm’s length with the respective subsidiaries.
At that time, the taxpayer was deemed by s. 256(9) to have no longer had legal control of the subsidiary from the beginning of that day – and the taxpayer also was dealing with the subsidiary at arm’s length as a factual matter at that time, given that a WTC nominee had taken charge as director and officer of the subsidiary two days’ previously, as requested by it for its commercial (albeit, ineffectual) purposes.
S. 160(1) also was inapplicable on the basis that (having regard to s. 160(1)(e)) the taxpayers received the fair market value of their shares. In this regard, Owen J stated:
[I]n my view the words “consideration given for the property”, when read in the context of the entire subsection, can only mean consideration given by the transferee for the property regardless of who receives that consideration. …
Owen J then turned to the Crown’s GAAR position, which was that there was an abusive avoidance of s. 160, having regard to the proposition that s. 160 would have applied to the taxpayers if they had instead received the Property as a dividend on their shares. In rejecting this alternate transaction, Owen J stated:
The role of the subsidiaries as single purpose corporations created to be sold to WTC precluded a dividend of any kind as that would be offside the terms of the sale for which the subsidiaries were expressly created is a transfer of property without consideration.
He concluded that there was no tax benefit.
He also found that there was no avoidance transaction, stating that the taxpayers “undertook the Transactions to effect the sale of their shares in the subsidiaries to WTC on a tax efficient basis” and that there was “no evidence to suggest that in 2006 the Appellants considered the application of section 160 and took steps to avoid the application of that provision.”
Finally, there was no abuse, as to which he stated:
[S]ubsection 160(1) was not frustrated or circumvented. The subsection applied exactly as intended.
S. 160 instead applied to the transfer of the Property from the subsidiaries to WTC.
Neal Armstrong. Summaries of Damis Properties Inc. v. The Queen, 2021 TCC 24 under s. 160(1), Reg. 1102(1)(c), s. 245(1) – tax benefit, s. 245(3) and General Concepts – Onus.
CRA indicates that where a drop shipment sale is not completed and the goods are bought back by the non-resident, the 1st sale can be rendered GST/HST taxable
A non-resident that does not carry on business in Canada acquired goods from a registered supplier in Canada, who retained physical possession of the goods after the acquisition. Although the non-resident had intended to export the goods for sale outside Canada, it was unable to find a buyer, and it instead sells them back to the resident supplier.
CRA indicated that a subsequent sale by the supplier of the goods generally will cause the original sale by it to the non-resident to be rendered taxable under s. 179(1)(d) unless one of the s. 179 relieving provisions applies, e.g., the new sale was an export sale described in s. 179(4).
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.3 under s. 179(1)(d).
CRA indicates that it will only grant a request in a objection to confirm a GST/HST assessment without consideration in exceptional circumstances
ETA s. 301(4) provides "where, in a notice of objection, a person who wishes to appeal directly to the Tax Court requests the Minister not to reconsider the assessment objected to, the Minister may confirm the assessment without reconsideration.” When CRA receives such a request to confirm without reconsideration, it will do so only “in those exceptional circumstances where the Agency wishes to resolve a controversial issue in court” and is satisfied that this is a file for which it is suitable to go directly to court.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.2 under ETA s. 301(4).
CRA finds that the transfer of non-resident ownership of an aircraft subjected the Canadian lessee to further GST the next time it imported the aircraft
We have uploaded summaries of questions posed to CRA at the February 27, 2020 CBA Commodity Tax Roundtable together with the full text of the CRA responses.
A commercial aircraft, which was owned by a non-registered, non-resident was leased to a registered Canadian-resident corporation (the “Lessee”) for use in its international transportation business, was originally delivered to Lessee outside of Canada, with Lessee then paying GST on its importation. Ownership of the aircraft is then transferred outside Canada to a non-registered non-resident purchaser while the aircraft is situate outside Canada, whereupon the lease is novated. The aircraft is delivered to Lessee under the novated lease when it is physically situated outside of Canada, following which the Lessee brings the aircraft into Canada in connection with its international transportation business.
CRA confirmed that GST would be payable under Division III of the ETA on this importation of the aircraft, i.e., the effect of the novation was that the lessee was required to pay Division III tax a second time.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.1 under Non-Taxable Imported Goods (GST/HST) Regulations, s. 3(n)(i)(A).
CRA rules on the utilization of the Canadian branch losses of a US affiliate through its continuance to Canada and amalgamation with Profitco
A US parent indirectly holds a profitable Canadian corporation (Canco1), and a US subsidiary (USco1) that has been carrying on a branch business in Canada at a loss. In order that Canco1 can access the non-capital losses of USco1, USco1 will be continued twice: the first time, perhaps into another US jurisdiction that has better continuance provisions; and the second time, into a provincial jurisdiction, where it (for US tax reasons) will initially be a ULC, but then will convert to a regular business corporation. USco1 will then be continued under the CBCA, in order that it can amalgamate with Canco1, which is a CBCA corporation.
Rulings included that USco1 will continue to be the same corporation following the continuances and that, in light inter alia of s. 87(2.1), the non-capital losses of USco1 will be available to be utilized by Amalco (which will continue to carry on the USco1 business).
Neal Armstrong. Summary of 2020 Ruling 2019-0819871R3 under s. 87(2.1).
Greenhouse Gas Reference – Supreme Court finds that the federal greenhouse gas (GHG) charges are valid under the POGG power and are not taxes
The majority of the Supreme Court found that the fuel charge and excess emissions charges imposed under the Greenhouse Gas Pollution Pricing Act, Part 5 (the “GGPPA”) of the Budget Implementation Act, 2018, No. 1 are constitutionally valid on the basis of coming within the national concern branch of the federal peace, order and good government (POGG) power. It also noted in passing that the levies were not disguised taxation given that the “GGPPA as a whole is directed to establishing minimum national standards of GHG price stringency to reduce GHG emissions, not to the generation of revenue.”
Neal Armstrong. Summary of Reference re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11 under Constitution Act, 1867, s. 91.
CRA indicates that payment by a flow-through share issuer of fees for investor procurement services of an arm’s length promoter would not taint the shares as prescribed shares
CRA indicated that the payment of a fee by a flow-through share issuer to the promoter equalling the FMV of its services in finding individual purchasers for the shares and related services generally would not cause such shares to be prescribed shares.
Neal Armstrong. Summary of 9 December 2020 External T.I. 2020-0852321E5 under Reg. 6202.1(1)(b).
Income Tax Severed Letters 24 March 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Emergis – Tax Court of Canada finds that U.S. withholding tax applicable to a tower structure did not generate a s. 20(12) deduction
Emergis financed a U.S. acquisition through a tower structure under which:
- it made an interest-bearing loan to a subsidiary Canadian partnership (“USGP”);
- USGP funded such interest payments out of dividends received from a wholly-owned Nova Scotia ULC (“NSULC”);
- NSULC, in turn, received dividends out of the exempt surplus of a wholly-owned LLC; and
- the LLC received s. 95(2)(a)-recharacterized interest on the acquisition-financing loan made to “US Holdco”.
Emergis’ 99.9% effective share of the interest deduction of USGP for the loan largely offset its interest income from that loan and, in addition, it claimed the s. 112(1) deduction for its effective share of the dividend income from NSULC. From a U.S. perspective, the interest on the loan owing by USGP was deductible interest paid by a U.S. corporation (USGP) to a Canadian resident (Emergis), and was subject to U.S. withholding tax.
Before concluding that Emergis could not claim the s. 20(12) deduction for such withholding taxes, on the basis that they were “taxes … that can reasonably be regarded as having been paid by a corporation [Emergis] in respect of income from a share of the capital stock of a foreign affiliate of the corporation [the LLC],” Favreau J stated:
[T]he words “in respect of” are very broad … .
Given the flow of funds in this tower structure, there is some connection between the interest income paid by USGP and the dividends paid by LLC to USGP, which were reclaimed and reported by Emergis through its partnership interest in USGP.
After stating that the s. 20(12) exclusion at issue was “intended to restrict the availability of foreign tax relief where the provisions that deal with foreign affiliates can be said to have provided sufficient relief,” he noted that additional connecting factors between the interest payments and the underlying dividend from the LLC included:
- the interest deduction on the upper-tier loan was “dependent on a purpose of earning income which in this case is the dividend flowing from LLC and on from NSULC”
- “the only cross-border source of income recognized by the Act is the income from a share of LLC, which can reasonably be regarded as the income on which foreign tax was levied, since the interest income [itself] is seen as paid by a Canadian resident to another"
Neal Armstrong. Summary of Emergis Inc. v. The Queen, 2021 TCC 23 under s. 20(12).
CRA rules on a pipeline bump transaction
CRA ruled on pipeline transactions respecting common shares of Opco which the deceased held on death, in which:
- the estate redeems common shares of Opco on which the capital gains exemption was claimed, resulting in a deemed dividend and a capital loss, which is carried back under s. 164(6)
- the estate transfers its common shares of Opco to the Newco newly-incorporated by it mostly in consideration for a demand note of Newco
- Opco continues to carry on its business for at least 12 months thereafter, and is then permitted to amalgamate with Newco
- in connection with the amalgamation, Amalco designates, in its return of income for its first taxation year, an amount under ss. 87(11) and 88(1)(c) and (d) to bump the ACB of land that had been held continuously by Opco from before the date of the death until immediately prior to the amalgamation
- the Newco note is gradually repaid over a period of at least one year after the amalgamation, with Amalco continuing to carry on the business.
Neal Armstrong. Summaries of 2020 Ruling 2020-0860231R3 under s. 84(2) and s. 88(1)(d.3).