News of Note
Devon Canada – Tax Court of Canada finds objecting large corporations need not specify partial expense deductibility in the alternative to full deductibility
Email this ContentGraham J found that if a large corporation objects on the basis that an expense is fully deductible, it is not precluded by the no-new-issue rule in s. 169(2.1) from arguing on appeal that the item is partly deductible in that year, e.g., under s. 20(1)(e). Similarly, when it specifies relief based on the full deduction, it is impliedly requesting pro rata relief if there instead is only partial deductibility.
Neal Armstrong. Summary of Devon Canada Corporation v. The Queen, 2014 TCC 255 under s. 169(2.1).
US LLLPs are partnerships
Notwithstanding that CRA declined (in 2014-0523041C6) to conclude on the point outside the context of a ruling request, a Delaware limited liability limited partnership should qualify as a partnership for Canadian taxation purposes given that it is essentially the same thing as a "regular" Delaware LP except for some somewhat enhanced limited liability protection.
Neal Armstrong. Summary of Kenneth Snider, "US Limited Liability Partnerships – DRUPA Revisited," International Tax (Wolters Kluwer CCH), Number 77, August 2014, p. 4 under s. 96.
CRA finds that "gross revenue" does not include cost rebates or subsidies such as volume rebates.
Although the definition of "gross revenue" includes all amounts received or receivable by the taxpayer (other than on capital account), CRA considers (at least for inter-provincial income allocation purposes under Reg. 402(3)) that gross revenue does not include amounts received in respect of taxpayer expenditures such as volume rebates or government assistance.
Similar issues arise under the "gross REIT revenue" definition in s. 122.1, which on a literal reading could include a wide range of receipts such as loan proceeds.
In 2010-0382161I7 F, CRA indicated that rebates or discounts only represent cost reductions rather than gross revenue if they are a price reduction at the time of purchase rather than being crystallized subsequently based on, say, yearly purchase volumes. (If purchased inventory is not sold until a subsequent year, this affects the timing of income recognition.) CRA noted that the above interpretation reverses this earlier position.
Neal Armstrong. Summary of 31 March 2014 Memo 2013-0514921I7 under s. 248(1) – gross revenue.
Marret Fund will convert from a forward sale fund to a conventional bond fund
The Marret Investment Grade Bond Fund currently achieves deferral and capital gains treatment on an underlying portfolio of mostly foreign bonds by having entered into a forward agreement for the sale of TSX-listed companies at prices reflecting the performance of the portfolio held in other hands. This arrangement will cease to be grandfathered from the character conversion (a.k.a. derivative forward agreement) rules if the maturity date of the forward agreement of October 31, 2014 is extended.
Accordingly, the forward agreement will be settled, the resulting net capital gain will be distributed to the unitholders and the Fund will continue on investing in the underlying portfolio directly.
There will be more transactions like this.
Neal Armstrong. Summary of Marret Investment Grade Bond Fund Circular under Other – Conversions – Forward Sale Fund to Conventional Fund.
CRA rules and opines that deemed (s. 214(7)) interest on the conversion or sale of a convertible debenture is not participating debt interest
A 2012 ruling letter (2011-0418721R3) ruled that the interest coupons on a U.S.-dollar convertible note (whose terms were "plain vanilla" except that the issuer had the option to satisfy a conversion request by paying cash, and there is no period prior to maturity during which there is an unfettered right to convert) were not participating debt interest, so that the interest coupons paid to an arm’s length note purchaser (ACO) would not be subject to Part XIII tax. An amendment to this ruling letter now provides that "any" amount deemed under s. 214(7) to be a payment of interest on conversion of the Note by ACO also will not be subject to Part XIII tax.
Furthermore, CRA opined that on a sale of the note by ACO to an arm’s length Canadian-resident purchaser for cash "any amount deemed to be a payment of interest…. under subsection 214(7) would not in general constitute ‘participating debt interest’." (This presumably was given only as an opinion as such a purchaser has not been lined up.)
Neal Armstrong. Summary of 2012 Ruling 2011-0418721R3, as amended by 2014-0532411R3, under s. 212(3) – participating interest.
Income Tax Severed Letters 10 September 2014
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Provincial GAAR rulings are the new normal in loss transfer rulings
A lossco parent will not transfer losses to a profitco subsidiary under typical triangular loss-shifting techniques because profitco has public shareholders and does not wish to incur debt. Accordingly, lossco will engage in such techniques to transfer losses to a newco subsidiary (Aco), and then transfer Aco to profitco to be wound-up under s. 88(1.1) (2013-0511991R3 and 2013-0496351R3 are similar). More realistically than 2013-0496351R3, the usual borrowing capacity rep is given in relation to the lossco rather than Aco.
Similarly to 2013-0496351R3 and 2013-0504301R3, provincial GAAR rulings were given (the new normal). Also the unwinding of the loss transfer transactions will occur on a cashless basis (a somewhat older normal) – which may be safer than using payments by direction. (There is recent anecdotal evidence of CRA challenging the latter.)
Neal Armstrong. Summary of 2014 Ruling 2014-0518451R3 under s. 111(1)(a).
Porter and Bunn suggest streamlining the unduly-restrictive s. 95(2)(a)(ii)(D) rule
S. 95(2)(a)(ii)((D) typically deems interest income on a loan from one foreign affiliate (FA1) to FA2 to be active business income of FA1 where FA2 used the borrowed money for the purpose of earning income from excluded-property shares of FA3. Shawn Porter (who no longer is at Finance) and David Bunn submit that this use test is unduly restrictive. For example, it will be problematic if:
- FA2 borrows from FA1 to distribute paid-up capital which is attributable to FA3;
- Moneys borrowed by FA2 from FA1 are used on its merger with the Holdco for FA3 to redeem Holdco shareholders; or
- FA2 borrows money from FA1 to distribute PUC to Canco (viewed as a borrowing which on a "fill the hole" tracing theory relates indirectly to FA2 earning income from FA1 shares).
They suggest streamlining the rule:
[I]ncome of a particular FA would be eligible for ABI characterization in circumstances where the income is derived from amounts that are paid or payable to the particular FA…by another FA of the taxpayer to the extent the amounts are deductible by the other FA in computing income from a property of the other FA that qualifies as an excluded property throughout the particular period.
Neal Armstrong. Summary of Shawn D. Porter and David Bunn, "Is it Time to Simplify the Holding Company Rule?", International Tax Planning (Federated Press), Volume XIX, No. 2, 2014, p. 1304 under s. 95(2)(a)(ii)(D).
CRA may require a court order for determining a point of provincial law
CRA does not consider that Easingwood v. Cockroft, 2013 BCCA 182, stands for the blanket proposition that the attorney under a power of attorney for property can validly transfer the taxpayer’s property to an inter vivos trust created by the attorney, and states that it "would expect that an Attorney that is contemplating the creation of an alter ego trust would seek the affirmation of the applicable court that the particular terms of the Power of Attorney for Property provide for such a power and that the terms of the proposed trust conform with the terms of the existing will and any other relevant agreements."
Neal Armstrong. Summary of May 2014 CALU Roundtable, Q. 6, 2014-0523331C6 under s. 73(1.01)(c).
McInnes - Tax Court finds that services provided at a furnished chalet were insufficient to render it a non-rental property
In finding that a chalet which was rented out on a furnished basis was a rental property rather than a source of business income (so that the rental property restriction rule in Reg. 1100(11) applied), Masse J stated that this conclusion will be reached where the taxpayer "cannot demonstrate that the range of services provided by her are such that the [rental] payments can in substantial part ["bonne partie"] be attributed to such services."
Neal Armstrong. Summary of McInnes v. The Queen, 2014 CCI 247 under Reg. 1100(14).