News of Note
Income Tax Severed Letters 13 August 2014
Email this ContentThis morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hillis v. AG (Cda) – Constitutionality of the Canadian FATCA legislation is challenged
Ginny Hillis, who was born in the U.S. to Canadian-citizen parents and came to Canada when she was five, has launched an action (through Farris, Vaughan) to have the Canadian FATCA legislation declared void as unconstitutional on any one of five alternative grounds. The ground which might have the most legs is that the provision of the stipulated accountholder information about her and other US persons by Canadian financial institutions to the IRS (via CRA) occurs without any judicial authorization or notice to her or opportunity for her to be heard, and therefore violates her reasonable expectations of privacy contrary to her Charter right to be secure against unreasonable search or seizure. See Clayton, Kloster, Norwood and Gernhart.
A potential weak link in an argument that the FATCA legislation is also void for discriminating against residents of Canada who are US Persons is the potential need (see Fannon) to establish that "US Persons living in Canada are subject to prejudicial stereotypes and treatment in Canada and the United States."
Neal Armstrong. Summary of Statement of Claim of Hillis against the Attorney General of Canada under Charter – s. 8.
CRA has been reinvigorated in alleging “sham”
A book was recently published discussing the sham doctrine in the English-speaking world, with a focus on tax. In the chapter written by Loutzenhiser on the Canadian cases, he suggests that Stubart and Faraggi indicate that a "sham" can be created by a taxpayer unilaterally, i.e., without a common intention with another to deceive, and then states that Antle:
appears to be intended to 'lower the bar' and make it easier for a court to find a sham exists, possibly by signalling to judges that they should not be unduly troubled about the level of proof required to establish the necessary deceit. In fact, there is some anecdotal evidence that the CRA has begun to issue more assessments alleging sham since Antle.
Neal Armstrong. Summary of Glen Loutzenhiser, "Sham in the Canadian Courts," Sham Transactions (Edwin Simpson and Miranda Stewart, editors), Oxford University Press, 2014 under General Concepts - Sham.
Inter-Leasing – Ontario Court of Appeal finds no GAAR abuse in structuring to access a property income exemption which reflected a deliberate policy choice
A plan to generate interest deductions in Alberta while enjoying a tax exemption on the corresponding interest income received by an Ontario affiliate (Inter-Leasing) depended on the interest income qualifying as income from property – which it did, given that essentially all Inter-Leasing did was to collect the annual interest coupons. Unlike Marconi, Inter-Leasing did not have specific corporate objects. The fact that earning the interest income came within its general objects was irrelevant.
Ontario's GAAR did not apply, as the exemption reflected a "deliberate decision not to tax corporations incorporated outside Canada on income from property," so that the statement in Copthorne, that "in some cases the underlying rationale of a provision would be no broader than the text itself," was apt.
Ontario corporate minimum tax was avoided by making the debts held by Inter-Leasing specialty debts and holding the deeds outside Canada. Pardu JA rejected a Ministry submission that she should apply the Williams (i.e., Indian Act exemption) "connecting factors" tests rather than the traditional private international law tests, to determine the situs of the debt, as the Williams tests are mushy, whereas the traditional common law situs tests can be clearly applied. (This approach also would "promote certainty" under Income Tax and Excise Tax situs tests, e.g., the situs under ITA s. 122.1(1.3)(b) of debt which is deemed real or immovable property.)
Neal Armstrong. Summaries of Inter-Leasing, Inc. v. Ontario (Revenue), 2014 ONCA 575 under s. 115(1)(a)(ii), s. 245(4) and Ontario Taxation Act - s. 54(2)(b).
CRA will not accept revenue-based methods for calculating ITCs if they do not reflect the relative taxable/exempt use of inputs for GST/HST purposes
In its memo dealing with input tax credit methodologies for registrants (other than financial institutions), CRA has expanded the discussion of the requirement in ETA s. 141.01(5) that the registrant’s method be "fair and reasonable," stating that this requires that the "particular method accurately reflects the purpose for which the property or service was acquired." It gives the example of a public institution which is mostly government-funded and is mostly engaged in making (free) exempt supplies, but makes minor sales which are mostly taxable rather than exempt. CRA considers that it would be unreasonable for the institution to use a revenue-based methodology to claim most of its HST costs as ITCs (i.e., on the basis that most of its sales were taxable.)
There's probably an audit story associated with this example.
Neal Armstrong. Summaries of Memorandum (New Series) 8-3 "Calculating Input Tax Credits" August 2014 under ETA – s. 141.10(5) and ETA – s. 169(1).
CRA requires filing of articles of dissolution before applying s. 88 to a wind-up
A lossco parent could not transfer losses to a profitco subsidiary under typical triangular loss-shifting techniques because profitco (which likely is a financial institution) is precluded from receiving a loan from lossco. 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) (see also 2013-0496351R3). Bizarrely, a representation was given that the interest-bearing loan by lossco to Aco (which has no assets) "will not exceed the amount that ACo could reasonably be expected to borrow from an arm’s-length financial institution."
Notwithstanding the favourable comments in IT-126R2, para. 5 on when a corporation is considered to have been wound-up, CRA ruled that s. 88(1.1) would not apply to the winding-up of Aco until articles of dissolution were filed. 2013-0496351R3 is similar.
Similarly to 2013-0504301R3, a provincial GAAR ruling was given.
Neal Armstrong. Summary of 2014 Ruling 2013-0511991R3 under s. 111(1)(a).
Avoiding a services PE by seconding employees to the source jurisdiction affiliate is very difficult to achieve
In a 25 February 2014 Head Office memo (2013-0475161I7), CRA indicated that if employees of a US company (USco) have been seconded to Canadian affiliates, their services are not counted in determining whether USco has either a construction site permanent establishment (Art. V, para. 3) or a services PE under para. 9 (since their activities now are those of the Canadian affiliates). In this regard, Nitikman notes, after discussing some Indian cases including Morgan Stanley, Centrica and Bamford, that "the case law suggests that a true secondment is difficult to achieve," as the employees invariably will want to maintain their benefits qua employee with USco (e.g., pension plan or insurance).
Nitikman disagrees with a statement in the memo that "if USCo does not have a [construction site] PE under paragraph 3 of Article V, then all of the services rendered in Canada, including those rendered at the construction site, can be considered when making a determination under paragraph 9" respecting a services PE, as this contradicts a statement of the US Senate Joint Committee staff (as well as other commentary) to the effect that "paragraph 9 does not apply to construction services that do not meet the requirements of paragraph 3 for permanent establishment."
Neal Armstrong. Summary of Joel A. Nitikman, "More on Services PEs – What is a Connected Project?," Canadian Tax Journal, (2014) 62:2, 317-82 under Treaties – Art. 5.
CRA rules that distributions made by a cross-border mutual fund trust to U.S. residents are exempt from withholding
All the distributions made by a listed Canadian mutual fund trust to its unitholders who are qualifying persons under the Canada-U.S. Treaty will not be subject to Part XIII tax. The distributions will be funded out of interest received by it on cross-border notes owing to it by the "US Opco" holding all its U.S. real estate assets and out of ROC payments made by US Opco to its Canadian holding company, which will be distributed as ROC payments by that Canadian holdco to the fund. The U.S.-source interest income will be exempted under Art. XXII, para. 2 of the Canada- U.S. Convention, which applies to income paid by a resident Canadian trust to a resident of the U.S. to the extent such income is "distributed out of income arising outside [Canada]."
Neal Armstrong. Summary of 2014 Ruling 2013-0509431R3 under Treaties – Art. 22.
CRA confirms that the “cost” of eligible capital property for thin cap purposes means its original cost rather than cost amount
Under the expanded thin cap rules, Canadian branches of non-resident corporations or trusts are limited to debt of 60% of the "cost" of assets used or held in the Canadian activities. CRA has confirmed that the "cost" of eligible capital property means its "original acquisition cost" rather than (amortized) "cost amount." It made essentially the same finding in 2013-0513761E5 respecting depreciable property.
A similar point arises under the gross REIT revenue definition, which provides for the deduction of the cost rather than cost amount of property which has been disposed of.
Neal Armstrong. Summary of 22 July 2014 T.I. 2014-0526631E5 under s. 18(5) – equity amount.
Income Tax Severed Letters 6 August 2014
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.