News of Note
North American Financials Capital Securities Trust to eliminate forward structure on taxable basis
Email this ContentThe TSX-listed North American Financials Capital Securities Trust achieved indirect exposure to a portfolio of subordinated bank debt instruments by entering into a forward purchase and sale agreement with BMO respecting Canadian securities (which it did not own). The underlying portfolio was managed by its manager. This forward agreement will cease to be grandfathered from the character conversion rules at the end of 2014. Accordingly, it will be terminated, and there will be a special distribution of the resulting net realized capital gain – and the Trust will acquire the portfolio securities directly and start distributing the net interest income to the unitholders rather than making "tax efficient" distributions.
The disclosure seems to contemplate that the cash portion of the special distribution will be equal only to the tax liability of unitholders resulting from the associated allocation of taxable capital gains.
Neal Armstrong. Summary of North American Financials Capital Securities Trust Circular under Public Transactions – Other – Conversions – Forward Fund to Conventional Fund.
CRA confirms that the issuer of registered debentures can satisfy its T5 obligations through its paying agent issuing T5s to the brokers who hold the debentures
If the issuer of debentures which have been registered in the names of brokers pays interest to a paying agent, it does not issue T5s to the paying agent as that agent is paying the interest on the issuer's behalf rather than receiving interest on behalf of beneficial owners of the interest. However, it or the paying agent (but not both) must issue T5s to the brokers who, in turn, issue T5s to their clients.
Neal Armstrong. Summary of 15 August 2014 T.I. 2014-0532941E5 under Reg. 201(1).
CRA confirms that s. 96(1.1) agreements have retroactive effect
CRA considers that an agreement under s. 96(1.1) to allocate income to a retired partner has retroactive effect to the time that she retired. Accordingly, if she retired at January 31, 2014, which was the end of an off-calendar fiscal period previously elected under s. 249.1(4), she will be required to add 11 months’ worth of income pursuant to s. 34.1(1) even if the agreement to allocate income to her is not entered into until January 2015.
Neal Armstrong. Summary of 10 September 2014 T.I. 2014-0522551E5 under s. 96(1.1).
R-Xtra – Tax Court of Canada accepts that a hotel business generates services revenues
C Miller J accepted that the services provided by a motel or hotel to its customers are sufficient to transform the related revenues so that it does not have a business of principally earning property income (i.e., so that there is no "specified investment business"). However, this approach was inapplicable to a storage unit rental business’s revenues notwithstanding potential ancillary services (e.g., moving items into or out of storage), as what was being paid for was the storage.
This affirmation that hotels do not have businesses of earning property income is relevant elsewhere, e.g., the foreign accrual property income rules (see American Hotel offering).
Neal Armstrong. Summaries of 0742443 B.C. Ltd. [R-Xtra] v. The Queen, 2014 TCC 301 under s. 125(7) and General Concepts – Onus.
Garage Gilles Roy – Tax Court of Canada finds that an emailed claim was not an invoice for GST purposes
Rendering an invoice generally triggers an obligation to collect GST. Claims for repair work done by a garage, which it emailed to the servicer of the manufacturer’s warranty, were found by Favreau J to not be invoices. They did not crystallize a liability for the work as there was a real prospect that the charges would be rejected in whole or in part. Instead, GST did not become payable until the claims were approved.
Neal Armstrong. Summary of Garage Gilles Roy (2007) Inc. v. The Queen, 2014 CCI 269 under ETA, s. 152(1).
S. 50 write-down by the debtor’s controlling shareholder triggers a forgiveness
If an individual writes-down a debt owing to him by his insolvent corporation under s. 50, the debt parking rules will apply to deem the debt to be forgiven (even if there is no settlement of the debt on general principles).
Neal Armstrong. Summary of 8 August 2014 T.I. 2014-0524951E5 under s. 80.01(8) and s. 80(2)(a).
Reversing position, CRA recognizes that an MRPS redemption premium was proceeds rather than dividend
Luxembourg accommodates the issuance of mandatory redeemable preferred shares ("MRPS"), which are treated as debt for Luxembourg interest-deduction purposes but are shares under Luxembourg corporate law. In 2012-0439741I7, CRA indicated that the premium received on a MRPS redemption was a dividend to the Canadian holder on ordinary principles (i.e., even before applying s. 90(2)).
CRA has now reversed this position (and removed this internal interpretation from its database), stating: "In the absence of an election under subsection 93(1)… redemption proceeds are treated as proceeds of disposition."
Neal Armstrong. Summary of 25 August 2014 T.I. 2014-0528361E5 under s. 90(1).
S. 40(3.6) does not deny capital loss on winding-up a CFA
S. 40(3.6) does not apply to deny a loss realized on the winding-up of a subsidiary (in this case, a controlled foreign affiliate) both because s. 69(5)(d) specifically ousts the application of s. 40(3.6) respecting property (in this case, the CFA’s shares) disposed of on a winding-up, and also because it is unlikely that under the foreign corporate law the CFA would be considered to still exist immediately after that disposition.
Neal Armstrong. Summaries of 15 August 2014 Memo 2014-0538591I7 under s. 40(3.6) and s. 93(2.01).
Income Tax Severed Letters 15 October 2014
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers experimental development of a manufacturing company to potentially qualify as a manufacturing or processing activity for class 29 purposes
CRA considers that a machine which is used by a manufacturing company in experimental development will qualify as a Class 29 asset for CCA purposes provided that it relates to the ultimate sale of commercial product. Jumping over some of the qualifiers, this likely would be the case where the machine is used to create a prototype of equipment that would be used in the manufacturing of such product.
This question now is relevant as s. 37(1)(b), which provided a current deduction for research-related capital expenditures on depreciable property, has been repealed.
Neal Armstrong. Summary of 11 August 2014 Memo 2014-0528231I7 F under Sched. II – Class 29.