News of Note
Abdalla – Tax Court of Canada finds that a “poorly worded” CRA-drafted waiver nonetheless was good enough to effect a valid waiver of appeal rights when signed
Email this ContentIn rejecting taxpayers’ submissions that they had not given valid waivers of their right to appeal, Rossiter CJ quoted the statement in Saskatchewan River Bungalows, [1994] 2 SCR 490 that:
Waiver will be found only where the evidence demonstrates that the party waiving had (1) a full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them.
In finding that this test was satisfied here, he stated that although the waiver letter drafted by CRA was “poorly worded … if read in its entirety … there is a sufficient and adequate explanation in the letter [such] that a person would have full knowledge of the rights being waived.”
Neal Armstrong. Summary of Abdalla v. The Queen, 2017 TCC 222 under s. 169(2.2).
Interest that is denied under the thin cap rules and recharacterized as dividends is still interest for FAPI and LRIP/GRIP purposes
A portion of the interest paid by CanCo to ForCo, which is a controlled foreign affiliate of the Canadian parent of CanCo, is not deductible pursuant to s. 18(4) and is deemed by s. 214(16) to have been paid as a dividend (with CanCo designating under s. 214(16)(b) which particular payment is deemed to be the dividend.)
CRA noted that, as per its preamble, s. 214(16) only applies for Part XIII purposes, so that s. 214(16) would have no effect on CanCo’s LRIP or GRIP balances nor alter the character of the income received by ForCo as interest for foreign accrual property income purposes.
Neal Armstrong. Summary of 5 October 2017 Internal T.I. 2015-0614021I7 under s. 214(16).
Income Tax Severed Letters 29 November 2017
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Greither Estate – B.C. Supreme Court finds that taking back excess boot cannot be rectified under the BCA provision for correcting “corporate” mistakes
A non-resident estate, whose shares of a Canadian company had stepped-up basis under s. 70(5) but had nominal paid-up capital, was advised by a tax lawyer who had forgotten about s. 212.1. After it had been assessed for withholding tax as a result of transferring its shares of the company to a related company for consideration consisting mostly of a promissory note, it applied for relief pursuant to s. 229 of the B.C. Business Corporations Act to correct this “corporate” mistake.
Meyer J noted the somewhat narrow list of types of corrections in s. 229 and found that “the mistake of not completing the Transaction in the most tax effective manner does not … fall within these subsections.” Although he was not asked to provide relief under the general rectification doctrine, he commented on this anyway, stating:
As stated by the majority … in Fairmont Hotels business and individuals should not be allowed to exploit rectification for the purposes of engaging in retroactive tax planning and as stated by the dissent, “allowing parties to rewrite documents and restructure their affairs based solely on a generalized and all-encompassing preference for paying lower taxes is not consistent with the equitable principles that inform rectification.”
Neal Armstrong. Summary of Greither Estate v. Canada (Attorney General), 2017 BCSC 994 under General Concepts – Rectification.
Aubrey Dan Family Trust – Ontario Court of Appeal confirms that a federal form applied for Ontario purposes without any specific reference on its face to that effect
A purported Alberta trust, that wanted more time to make submissions to CRA that it was not resident in Ontario, provided a related waiver on the prescribed (T2029) federal form. When it was ultimately reassessed for Ontario income tax (with the previously assessed Alberta tax being reversed) it unsuccessfully argued that the waiver was invalid because the T2029 form did not refer to the fact that it was a prescribed form for provincial purposes. The Court of Appeal confirmed the finding of Lederman J below that it was sufficient, for the form to “purport” to be an authorized form for these purposes, to bear the CRA insignia without any reference being made to it being the prescribed form for Ontario purposes.
Neal Armstrong Summary of Aubrey Dan Family Trust v. Minister of Finance, 2017 ONCA 875 under Taxation Act, 2007 (Ontario), s. 158.
Five further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for five French technical interpretation released in April 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for December.
CRA may rule that an election for a listed Target to cease to be a public corporation can be made after Target’s amalgamation
A corporation cannot make an election under (c)(i) of the public corporation definition to cease to be a public corporation (based on now being closely held) while its shares are still listed. This may be problematic if the stock exchange has not confirmed the delisting of Target until following the amalgamation of Target with Buyco (given that Amalco is tainted as a public corporation if a predecessor was so tainted.)
However, CRA generally is prepared to rule that the election can be made after the amalgamation (and after the delisting has occurred) even though at the time of making the election the Target shares no longer exist.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.12 under s. 89(1) - public corporation - (c)(i).
CRA indicates that the Treaty anti-hybrid rule (Art. 7(b)) applies to dividends paid by a ULC to two LLCs held by U.S. C-Corps
A Canadian-resident unlimited liability company (ULC) pays dividends to its two (disregarded) LLC shareholders, which are each held by a U.S. C-Corp. Are the dividends eligible for Treaty benefits?
CRA indicated that because ULC is fiscally transparent, the payment from ULC of a dividend is viewed as a partnership distribution, so that the same result in the two jurisdictions is not being obtained. Accordingly, the application of the anti-hybrid rule in para. 7(b) of Article IV of the Treaty would apply, so that the LLCs (which in the absence of the 7(b) rule, would qualify under para. 6 of Art. IV for Treaty benefits) would be subject to 25% Canadian withholding tax on the dividends.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.11 under Treaties – Articles of Treaties - Art. 4.
CRA indicates that it could assess the same cross-border transaction both under GAAR and the PPT
CRA indicated that the GAAR Committee “may offer a useful model” for ensuring consistency of application of the MLI principal-purpose test (“PPT”) within the CRA when the MLI comes into effect. PPT ruling requests will be entertained when this occurs.
Although CRA continues to contemplate the application of GAAR to transactions undertaken primarily to secure a tax benefit accorded by a tax treaty (and has done so), it considers that in appropriate circumstances, the PPT and GAAR could apply as alternative assessing positions.
CRA considers it to be premature to assess how the case law on s. 245(4) will inform the PPT’s application.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.8 under Treaties - MLI - Art. 7(1).
CRA indicates that it will not extend its policy on set-off of unequal redemption notes beyond a butterfly reorg
As described in 2015-0601441R3, a partnership was wound-up under s. 98(5) by one partner (Sub2) transferring its partnership interest under s. 85(1) to the other partner (Sub2) for consideration including Sub1 Preferred Shares.
A second ruling letter deals with the elimination of this cross-shareholding in reliance on the s. 55(3)(a) rule. This is accomplished by the Parent of Sub2 exchanging its common shares of Sub2 under a s. 86 reorg for new common shares and (non-voting redeemable retractable) Sub2 Preferred Shares – and then transferring the Sub2 Preferred Shares under s. 85(1) to Sub1 under s. 85(1) in exchange for common shares of Sub1. Notes arising from the cross-redemption of the Sub1 Preferred Shares and Sub2 Preferred Shares then are set-off.
CRA ruled that the debt forgiveness rules would not apply to the note set-offs provided that the two notes were equal in amount. This is not as vacuous as it sounds. On a spin-off that complied with the butterfly rules, CRA would have ruled that s. 80 did not apply to the note set-off even though the two note amounts differed. This note difference typically arises because the value of the shares of the distributing corporation has a discount for underlying taxes, whereas the assets distributed by it to the transferee corporation do not. Here, the summary answered the question of “Whether administrative position in respect of section 80 applies” with “No,” stating: “Set-off and cancellation of debts not occurring in context of a distribution as defined in subsection 55(1).” The value of the Sub1 Preferred Shares reflected the value of a partnership interest for which there would be no discount for underlying taxes, whereas the value of the Sub2 Preferred Shares was effectively required to be based on the value of that partnership interest even though their redemption value was being carved out of a Sub2 equity value that likely reflected such a discount.
After the ruling application went in, a paragraph was added stipulating that, on the s. 86 reorg of Sub2, the paid-up common shares of the old common shares of Sub2 would be divided between the Sub2 Preferred Shares and the new common shares based on their relative fair market value.
Neal Armstrong. Summary of 2016 Ruling 2015-0623731R3 under s. 55(3)(a), s. 80(1) – forgiven amount and s. 86(1).