News of Note
CRA indicates that foreign currency is not property for purposes of the suspended-loss rules
Email this ContentA U.S.-dollar loan owing to an affiliated trust is repaid on its maturity, thereby resulting in an s. 39(2) FX loss to the borrower. The trust promptly relends those U.S.-dollar to the borrower. Is the s. 39(2) loss (which is deemed to be a loss from the disposition of foreign currency) suspended under s. 40(3.4) (or is it a superficial loss under s. 40(2)(g)(i), if the borrower is an individual)?
CRA indicated that the issue here is whether the USDs received by the borrower under the new loan are identical property to the foreign currency that it was deemed to have disposed of under s. 39(2), and noted that under the "property" definition in s. 248(1), “money could constitute property unless a contrary intention is evident” – but then stated:
However, the CRA's position is not to consider money to be identical property for the purposes of subparagraph 40(2)(g)(i) or subsections 40(3.3) and (3.4) in a circumstance such as this where a taxpayer sustains a loss under subsection 39(2).
Therefore, no suspended (or superficial) loss.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.10 under s. 40(3.3).
9199-3899 Québec – Quebec Court of Appeal finds that using the investment allowance to generate a capital tax savings abused its purpose of merely avoiding double taxation
In order to reduce Quebec capital tax, a Quebec company lent $350M on a non-interest-bearing basis to its parent on January 27, 2005, and claimed this amount as an investment allowance in computing its capital tax liability at its January 31, 2005 year end. On February 15, 2005, the loan was repaid so that the parent did not account for this loan in its capital when it, in turn, calculated its capital tax liability. In confirming the application of the Quebec general anti-avoidance rule to deny the investment allowance, Vézina JCA stated the resulting capital reduction “did not serve to rectify a prejudice, but created a benefit, which is contrary to the object and spirit of this disposition of simply addressing double taxation and not creating a tax exemption.”
This sounds like the MLI, Art. 6 statement that Treaties are intended “to eliminate double taxation … without creating opportunities for non-taxation.”
If correct, this case would suggest that GAAR can apply to simple and obvious transactions, rather than being restricted to transactions which are complicated and too clever by half. (Cf. Univar, where Webb JA indicated that funding an inbound purchase with a Canadian Buyco with high outside capital was such an obvious surplus-stripping stripping technique that it could not be considered an abuse of s. 212.1 - so that doing something more complicated to accomplish the same thing also was not abusive.)
Neal Armstrong. Summary of 9199-3899 Québec inc. v. Agence du revenu du Québec, 2017 QCCA 1524 under s. 245(4).
CRA indicates that s. 39(1.1) mostly only applies to those euros and U.S. dollars in your wallet
S. 39(1.1) applies if, because of any FX fluctuation, an individual has made a gain or loss on capital account from the disposition of a foreign currency. CRA does not consider that s. 39(1.1) could apply to a sum of money in foreign currency held on deposit by an individual at a financial institution, and would instead regard this as a debt of that institution owing to the individual. Accordingly, the usual rules (e.g., ss. 39(1) and 70)) would apply if that debt were disposed of on capital account.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.8 under s. 39(1.1).
Income Tax Severed Letters 18 October 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Plains Midstream – Tax Court of Canada finds that s. 16(1) operates symmetrically (no creditor interest – no debtor interest deduction)
To over-simplify somewhat, Amoco agreed to assume a $225M loan that was due in perhaps 43-years’ time and that was effectively non-interest-bearing (or more precisely, only bore interest to the extent of oil production from the Beaufort Sea) in consideration inter alia for the payment to it of $17.5 million by the debtor. Amoco treated the $207.5M difference between these two amounts as simple interest (no compound interest), which it deducted over the term of the loan on a straight-line basis. Someone then figured out that this worked out to a 29% p.a. interest rate on the $17.5M, and at trial it reduced its claim to a 6% rate. Its position was that under s. 16(1), regard should be had to the economic substance of the situation, which was that it received $17.5 million as the present value of $225 million.
One of the key points for Hogan J was that the Japanese creditor (APCJ ) was not entitled to any interest on the assumed loan. In denying any interest deduction, he stated:
The language used in subsection 16(1) of the ITA stating that the payment is “deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable” reflects Parliament’s intention that both parties receive symmetrical treatment. …
[N]o part of the amount that is due by the Appellant can reasonably be regarded as interest that is payable to APCJ under the terms and conditions of the … loan. …
[I]t is unthinkable that Parliament would have intended the asymmetrical treatment proposed by the Appellant as this would open the door to transactions in which one party receives a tax benefit and the other party receives a non-taxable payment, resulting in a one-sided tax expenditure. Explicit language would have been expected in this regard, as is the case with subsection 12(9) of the ITA and section 16.1 of the ITA.
Amoco assumed the loan as part of intricate arrangements for its acquisition of Dome Petroleum for $5.2B under a Plan of Arrangement. Hogan J stated obiter that the $207.5M difference might instead be an addition to the cost to Amoco of its Dome Petroleum shares.
Neal Armstrong. Summary of Plains Midstream Canada ULC v. The Queen, 2017 TCC 207 under s. 16(1) and s. 54 – adjusted cost base.
CRA states that MacDonald is “irreconcilable” with George Weston
We have prepared brief summaries of the questions posed at the 6 October 2017 APFF Financial Strategies and Instruments Roundtable, and are providing translations of the CRA preliminary written answers and of the Finance answers, as the cae may be, on a piecemeal basis. We will also provide complete translations of the questions posed to CRA when they are officially released, towards or about year end. (We have also completed translating the answers at the (regular) 6 October 2017 APFF Roundtable.)
Turning to Q.16, in commenting on MacDonald, CRA stated:
The approach taken by the TCC in this case respecting, inter alia, the linkage principle appears to be irreconcilable with previous jurisprudence, including George Weston … .
Nevertheless, the CRA is currently considering whether to change its approach pending the Federal Court of Appeal decision in James S. A. MacDonald.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.16 under s. 9 - capital vs. profit – futures/forwards/hedges.
CRA releases final versions of the 2017 STEP Roundtable
The final versions of the 13 June 2017 STEP Roundtable questions and answers were released last week by the Income Tax Rulings Directorate. Although we provided posts and summaries in June of the items with interpretive content, we are providing the Table below of all the items for convenience of reference.
The proposed ETA s. 272.1(8) is not a general partner distribution recharacterization rule
The draft ETA s. 272.1(8) rule merely deems fair market value consideration to have been paid to the general partner of an investment limited partnership for its management and administration services, without regard to the partnership distributions (such as on a “carry”) that in fact are paid.
That said, the new amendments, in conjunction with the existing rules, will likely lead to increased scrutiny of the activities of investment limited partnerships and may provide additional scope for … CRA … to assert on audit that partnership distributions (or portions thereof) should be characterized as taxable fees for services, as well as for disputes regarding the fair market value for such services.
Neal Armstrong. Summary of Allan Gelkopf, Robert Kreklewich and Zvi Halpern-Shavim, "Finance Canada Seeks Comments on New Tax Proposals Regarding Investment Limited Partnership Rules", Canadian Current Tax, Vol. 28, No.1, October 2017 p. 4 under ETA s. 272.1(8).
CRA applies the "holder-by-holder" method to treat contingent s. 251(5)(b) rights as being exercised re all the other shareholders
X, the sole shareholder of a CCPC, sells 25% of his shares to Acquireco, whose shareholders (also executives) are his son (as to 30%) and 10 unrelated individuals (each with 7%). The Acquireco shareholders’ agreement provides that, on any voluntary departure, the remaining shareholders have a proportionate right to acquire the departing employee’s shares.
In finding that X’s son would be deemed to control Acquireco by virtue of s. 251(5)(b)(i), so that s. 84.1 would apply to X’s sale to Acquireco, CRA stated:
As a general rule, the CRA will apply this presumption [in s. 251(5)(b)(i)] by taking into account the rights of Mr. X's son in respect of all other shareholders ("holder-by-holder" method). Accordingly, Mr. X's son would have rights to all of the shares because he would have rights to the shares of each of the shareholders if each of them became a shareholder affected by an event provided for in the agreement.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.17 under s. 251(5)(b)(i).
CRA states that a legally non-severable farm that is used both in farming and as a residence is one property for purposes of the s. 110.6 principal-use tests
A husband and wife equally own a partnership which for some time has been holding land which as to 80% was used in the farming business and as to 20% was used for their residence (with the residence not being legally severable). CRA indicated that because under the Quebec Civil Code “an owner of an immovable (for example, a piece of land) is the owner by accession to all structures and works located on the immovable,” the land was to be treated as one indivisible property for purposes of determining under the “interest in a family farm or fishing partnership” definition whether the land was used principally (over 50%) in a Canadian farming business. (The common law is the same.)
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.16 under s. 110.6(1) - “interest in a family farm or fishing partnership" - s. (a)(i).