News of Note
Wesdome Gold Mines – Cour du Québec finds that assessments of an already-dissolved corporation were invalid
Email this ContentThe immediately preceding post notes that Wesdome successfully appealed an assessment by ARQ of its 2005 year denying CEE deductions. In a 2014 decision, which we did not notice until now, the same judge found that assessments by ARQ of the 2006 and 2007 years (also denying CEE deductions) were invalid because Wesdome had been dissolved one day prior to the dates of the assessments in connection with completing its winding-up into its wholly-owning parent corporation.
Godbout J noted that, under s. 313 of the Quebec Business Corporations Act, the parent became liable for the obligations (including tax obligations) of the dissolved subsidiary, and found that the assessments instead should have been issued against the parent.
Neal Armstrong. Summary of Wesdome Gold Mines Ltd. v. ARQ, 2014 QCCQ 8444 under s. 152(1).
Wesdome Gold Mines – Cour du Québec finds that a mine on care and maintenance was a closed mine for CEE purposes
A company (”Wesdome”) acquired the Kiena mine in Quebec, which had been put on care and maintenance when its reserves had been exhausted over a year earlier, in order that it could extend an existing mine shaft to go under a lake and drill gold targets on its own exploration property to the north. This was a success, and the purchased Kiena mining facilities started processing ore from the new finds several years later.
ARQ denied CEE deductions under the Quebec equivalent of ITA, s. 66.1(6) – Canadian exploration expense – (c)(vi), which applied to “any expense that may reasonably be related to a mine…that has come into production in reasonable commercial quantities or to an actual or potential extension of such a mine.”
In allowing the deductions, Godbout J found that when the operation had ceased to be economic, it thereupon “became a closed mine, pure and simple.” This suggests that a mine which has been put on care and maintenance because its reserves have been exhausted has ceased to be an “existing” mine for CEE purposes. Accordingly, notwithstanding that the existing shaft was used for the exploration and the existing processing facilities subsequently were put back into production, the exclusion did not apply because this work and production related to a closed rather than existing mine.
Neal Armstrong. Summary of Wesdome Gold Mines Ltd. v. ARQ, 2016 QCCQ 1504 under s. 66.1(6) – Canadian exploration expense – (c).
Zhu – Federal Court of Appeal indicates that s. 253(b) should be interpreted restrictively in light of its purpose
S. 253(b) deems a non-resident person who “solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada” to thereby be carrying on business in Canada. Dawson JA has found that selling shares on a U.S. exchange through a U.S. broker does not engage s. 253(b) notwithstanding that the purchasers could be Canadian residents, stating that:
The contrary conclusion would be inconsistent with the purpose of section 253…“to subject non-resident persons to Canadian tax provided they carry out a minimum amount of commercial activity within Canada’s borders” (Maya Forestales…).
Neal Armstrong. Summary of Zhu v. The Queen, 2016 FCA 113 under s. 253(b).
CRA confirms that provincial carbon taxes are subject to HST/GST
CRA has published a Memorandum discussing ETA. s. 154. Various provincial taxes can be part of the consideration for a supply either through being deemede to be consideration by s. 154 or on general principles, so that GST or HST effectively is collectible on the amount of the provincial tax. An example is stewardship fees required to be paid by a tire manufacturer to a waste diversion organization under provincial waste diversion legislation both when the tire manufacturer charges the tire retailer for such fees and when the tire retailer breaks out a separate charge for same amounts in its invoice to retail tire purchasers. (See also 18 September 2015 Ruling 168521r.) A second example is a provincial carbon tax charged to a retail purchaser of gasoline.
Neal Armstrong. Summary of GST/HST Memorandum 3.5 “Application of GST/HST to Other Taxes, Duties, and Fees” April 2016 under ETA s. 154(2).
CRA finds that a payment out of a pension plan to a beneficiary of deceased employee was a pension rather than death benefit payment
A U.S. citizen is resident in Canada and was the beneficiary of a deceased U.S resident who had been a retired member of a U.S. public pension plan. CRA would consider a payment received under the plan by the beneficiary to be of a “superannuation or pension benefit” (includible in income under s. 56(1)(a)(i)) rather than of a “death benefit” (generally includible under s. 56(1)(a)(iii) but subject to a $10,000 exclusion from income). Relief from inclusion under s. 56(1)(a)(i) would be provided under Art. XVIII, para. 1of the Canada-U.S. Treaty to the extent of the amount that would be excluded from taxable income in the U.S. if the recipient were a resident thereof (e.g., respecting a deduction under Code s. 691(c)(1) respecting a pro rata portion of U.S. estate tax).
Neal Armstrong. Summaries of 2014-0525681E5 under s. 248(1) - superannuation or pension benefit, Treaties - Art. 18.
CRA applies the two-step approach to entity classification to find that MRPS (Luxembourg hybrid instruments which are “very similar to traditional shares under Canadian business corporations statutes”) are equity
After having treated mandatorily redeemable preferred shares (“MRPS”) as equity in a number of rulings, CRA has now provided a detailed analysis in support of this characterization in an internal technical interpretation, so that the Canadian parent in question was entitled to treat MRPS distributions from two Luxcos as coming out of exempt surplus.
CRA indicated that the two-step approach to entity classification is “often of considerable assistance in characterizing foreign instruments,” stated that “the status of the MRPS under the governing corporate and commercial law is of critical importance to the analysis,” and noted that their “characteristics are very similar to traditional shares under Canadian business corporations statutes,” including that they were governed by articles of incorporation, ranked after debt in a bankruptcy, could only be redeemed from funds available for distribution under Luxembourg law or from the proceeds of a new share issuances and voted on corporate matters such as the election of directors (although being non-voting would not have established that they were not shares). CRA also stated:
The fact that the MRPS must be redeemed on or before a stipulated date does not detract from their character as shares.
CRA also did not profess any concern that the Canadian parent was obligated under a “Keep Well” agreement with one of the Luxcos to subscribe for ordinary shares if the Luxco had insufficient funds to redeem the MRPS at their maturity, and that if the MRPS for the other Luxco could not be redeemed at their full redemption price, the residual portion remained payable and bore interest.
Neal Armstrong Summaries of 2015-0604491I7 under s. 248(1) – share and s. 90(2).
CRA confirms that the normal or extended reassessment period ends on the anniversary date of the original assessment
The normal reassessment period under s. 152(4)(a) or the extended reassessment period under s. 152(4)(b) ends at the end of the anniversary date of the date of the original assessment – so that in effect when counting out 365 (or 366) day years on your fingers you start on the day after the date on which the original assessment was issued.
Neal Armstrong. Summaries of 10 March 2016 Memorandum 2015-0614161I7 under Interpretation Act, s. 27(3) and Interpretation Act, s. 152(3.1).
CRA confirms that debt subject to the thin cap rules does not include accrued interest
The definition of “outstanding debts to specified non-residents” does not include outstanding accrued interest as compound interest thereon is not deductible until the year paid.
Neal Armstrong. Summary of 2016-0626841E5 under s. 18(5) - “outstanding debts to specified non-residents.”
CRA considers the assignment of a right to purchase Canadian real estate to be a disposition of taxable Canadian property
CRA considers that a right to acquire a Canadian real estate property (presumably under an agreement of purchase and sale) is an “option” in respect of the property under para. (f) of the taxable Canadian property definition, so that an assignment of such right by a non-resident constitutes a disposition of taxable Canadian property.
It is unclear why CRA considers such a right to be an option in respect of the property rather than (in a common law province) an equitable interest in the property. It would be news to an options trader that a binding obligation to acquire a property was an option.
Neal Armstrong. Summary of 2015-0608211E5 under s. 248(1) - taxable Canadian property - (f).
Edison LLC – Tax Court of Canada finds that a discretionary finder’s fee is not deductible
Two Florida LLCs of two Florida residents effectively had a joint venture to provide bussing services to the Olympic organizing committee for the 2010 Vancouver Olympics. A third LLC (“Edison”) was formed to provide many of the services. Although the documentation purported to make Edison’s key Canadian employee the owner of its shares, this was mere “window dressing” (to make it look like a separate enterprise in the eyes of the organizing committee), so that effectively the beneficial owner of Edison’s shares was one of the two Florida residents (Pouncey).
All of the estimated profits of Edison were made payable to Pouncey’s company pursuant to an agreement which was not prepared until the Olympics were finished. The rationale presented for the full deduction of this amount was that it was for support services provided by Pouncey’s company and for its services in procuring the Olympic contract work for Edison. CRA accepted the deduction of U.S.$400,000 of the fees as relating to support services provided. Pizzitelli J denied the deduction of the U.S.$2.1 million balance on numerous grounds, including that its amount was “discretionary,” stating:
[E]ven if I accept payment can be made for past services, there must at least be some agreement as to the quantum or calculation of such fee or commission in advance in the context of business in order to characterize such payments as such. It is in the very nature of these types of payments that they are calculable on some objective basis and not merely discretionary… .
Neal Armstrong. Summaries of Edison Transportation, LLC v. The Queen, 2016 TCC 80 under s. 18(1)(a) and General Concepts – Window Dressing.