News of Note
A Liechtenstein Foundation with a Canadian-resident beneficiary may not be subject to the NRT rules
Email this ContentAfter affirming its position that a Liechtenstein Foundation "generally will be considered to be a trust for purposes of the Act," CRA accepted that a Liechtenstein Foundation whose sole "beneficiary" was a resident Canadian individual was not subject to the NRT rules in s. 94(3) because the Foundation had no "resident beneficiary," whose definition requires the existence of a "connected contributor." There was none, as no Canadian resident had ever made a "contribution" (as broadly defined) to the Foundation.
Neal Armstrong. Summary of 20 August 2015 T.I. 2015-0581681E5 F under s. 94(1) - connected contributor.
CRA finds that a depreciable property continues as such on a s. 88(1) winding-up irrespective of the parent’s purpose
Reg. 1102(1)(c) provides that depreciable property does not include a property which is not acquired for an income-producing purpose. CRA dealt with the situation where a parent received depreciable property of its subsidiary on a s. 88(1) winding-up with no intention of using the property for an income–producing purpose (it was kept idle) - and a number of years later, sold the property at a loss.
In light of Reg. 1102(14), which deemed the property to belong to the same prescribed class as when it was held in the subsidiary, and the somewhat conflicting reasons in Hickman which nonetheless pointed in the same general direction, CRA concluded that the property retained its character as depreciable property in the hands of the parent. Furthermore, keeping the property idle did not constitute a change of use under s. 13(7)(a), so that the terminal loss was not realized until the year of the sale.
Although it was depreciable property, the parent nonetheless was precluded from claiming CCA, in light of the income-producing purpose test in the preamble to s. 20(1) that was emphasized in Hickman.
Neal Armstrong. Summaries of 22 June 2015 Memo 2014-0553731I7 under Reg. 1102(14), s. 13(7)(a) and s. 20(1).
Income Tax Severed Letters 7 October 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Large construction projects engage a litany of tax considerations
Tax considerations arising under a major construction project include:
- Significant deferral benefits can arise from the choice of the Project LP’s year end given that the stub period accrual rules do not bite if the previous year was not yet profitable.
- CRA has accommodated (e.g., in 2006-0218781R3) treating the Project LP’s construction costs as consideration for a right to access the construction site, so that such costs can be amortized as a Class 14 asset.
- For long-term projects, faster CCA write-offs may be available with a s. 13(29) election (or, alternatively, reliance might be placed on the rolling-start rule in s. 13(7)(b).)
- The interest capitalization rule in s. 21 also extends to s. 20(1)(e) financing costs.
- Investment in the project by a public corporation may engage consideration of the SIFT partnership rules – and sale of an interest in a project may engage the tax shelter rules if too much is stated about the projected results.
- PST considerations in B.C. engage the distinction between fixtures and tangible personal property.
Neal Armstrong. Summaries of Shane Onufrechuk and Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35 under s. 34.2(1) - Adjusted Stub Period Accrual Income, s. 12(1)(l.1), s. 18(6)(d), Class 14, s. 13(27)(b), s. 13(29), s. 21(1), s. 20(1)(e.1), s. 122.1(1) – investment, s. 237.1(1) – tax shelter, Provincial Sales Tax Act (B.C.), s. 1 – taxable service.
1057513 Ontario Inc. – Federal Court of Appeal states that RDTOH is not reduced by unclaimed dividend refunds
The taxpayer was ineligible for dividend refunds for various years because it did not file the returns claiming the dividend refunds within three years of the taxation year ends in question.
However, Webb JA stated obiter that the unclaimed refunds did not reduce the taxpayer's refundable dividend tax on hand. This comment is consistent with Tawa, MSH and Ottawa Ritz (the latter also a decision of Webb) in the Tax Court and is inconsistent with the CRA position (see 2012-0436181E5).
Neal Armstrong. Summaries of 1057513 Ontario Inc. v. The Queen, 2015 FCA 207 under s. 129(1) and s. 129(3).
Boettger – Court of Quebec finds that an Alberta trust whose trustee’s role was passive was resident in Quebec
An Alberta trust was found by Lavigne J to be resident in Quebec, on the basis of significantly weaker facts than in Discovery Trust (which was not cited to her). The settlor and beneficiary (his wife) were unfamiliar with the sole trustee (an Alberta lawyer), who instead was a contact of the Montreal law firm (and who could be removed by the settlor at any time). The most significant act of the trustee was something he was directed to do under the trust deed and thereafter there was essentially nothing for him to do other than send in the trust tax return along with payment. Lavigne J stated: "The role of the Trustee was not to manage and grow the assets of the NS Trust but rather to hold them passively and follow the detailed steps in the Plan dictated by the [professional advisors]."
Neal Armstrong. Summary of Boettger, trustee of Nancy Smith Spousal Trust v. ARC, 2015 QCCQ 7517 under s. 2(1).
Birchcliff – Tax Court of Canada finds that using a diverted private placement to avoid an acquisition of control of a lossco was abusive – and that the private placement was an avoidance transaction notwithstanding its “overarching” non-tax purpose
A newly-launched public corporation ("Birchcliff") accessed the losses of a lossco ("Veracel") in order to shelter the profits from producing oil and gas properties which it was acquiring. Private placement investors were told that they would subscribe for subscription receipts for Veracel rather than Birchcliff common shares, which was not a problem to them because Veracel was to be amalgamated with Birchcliff, with the subscription proceeds applied to the properties’ purchase. As they got a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided. The original Veracel shareholders got a modest preferred share interest in Amalco, which was redeemed for cash.
Hogan J found that although "the overarching purpose behind…the sale of subscription receipts by Veracel was to raise equity financing for the [properties’] acquisition, this does not provide a bona fide non-tax reason for having Veracel rather than Birchcliff issue the subscription receipts," so that such issuance was an avoidance transaction. This contrasts with a Spruce Credit Union approach, which would focus on the transaction’s primary non-tax purpose.
The transaction also was abusive under s. 245(4) as "Parliament did not want amalgamations and reverse takeovers being used as techniques to avoid an acquisition of control in situations where the original Lossco shareholders do not collectively receive shares representing a Majority Voting Interest in the combined enterprise."
The Crown unsuccessfully argued that the new investors’ transitory majority share ownership of Veracel was a "sham" notwithstanding this step occurred under a Plan of Arrangement (albeit, in Alberta), and that their collective participation in the transactions (including giving proxies to two officers) constituted them as a "group of persons."
Neal Armstrong. Summaries of Birchcliff Energy Ltd. v. The Queen, 2015 TCC 232 under s. 245(4), s. 245(3), s. 111(5)(a) and General Concepts – sham.
Holding companies may be able to carry forward losses following an acquisition of control
Where a parent corporation (or an intermediate managementco/holdco) is holding its investments in subsidiaries as part of a business, this suggests that its non-capital losses (e.g., from interest and financing expenses) can be carried forward following an acquisition of control for deduction from income from the same source such as dividend income from subsidiaries.
As a break fee should be viewed as being received pursuant to a pre-acquisition agreement for the acquisition of shares on capital account, an application of the analogous jurisprudence on the disposition of option contracts suggests that the break fee generally will be received on capital account. Given the "perfect circularity" of the s. 14 and 39 rules, it is unclear whether the break fee receipt would give rise to a capital gain or eligible capital amount.
Neal Armstrong. Summaries of Ian Gamble, "Income from a Business or Property: General Principles and Current Issues", 2014 Conference Report, Canadian Tax Foundation, 5:1-32 under s. 111(5)(a), s. 95(2)(a)(ii)(B) and s. 9 – capital gain v. profit – contract.
Responding to Anson, the UK Revenue states it will continue to treat LLCs as opaque
HMRC ambiguously stated that the Anson decision "means that where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies."
I understand from a senior U.K. correspondent of Nat Boidman that the "treating" is by HMRC rather than the IRS. He notes that HMRC have long regarded US LLCs as "opaque" (see INTM180030, which is a country-by-country listing of entities as transparent or opaque for U.K. income tax purposes), and are effectively saying they will continue to do so.
Neal Armstrong. Summaries of [U.K] Revenue and Customs Brief 15 (2015): HMRC response to the Supreme Court decision in George Anson v HMRC (2015) UKSC 44 and INTM180030 - "Foreign entity classification for UK tax purposes: List of Classifications of Foreign Entities for UK tax purposes" under s. 248(1) – corporation.
“Only in the most serious cases of non-compliance…does the CRA turn to revocation” of a charity
CRA conducted 840 audits of charities in the 2013-14 audit program, plus some additional political activities audits. Of the 840 audits, 513 resulted in (only) "education letters,"137 in compliance agreements, 5 in "sanctions" (presumably monetary penalties), 34 in revocation notices (and 20 in voluntary revocations). "Only in the most serious cases of non-compliance—for example, when an organization has a previous record of non-compliance, when the non-compliance has had a substantial adverse effect on others, or when an organization cannot or will not take steps to bring itself into compliance—does the CRA turn to revocation." CRA "audit[s] all registered charities that play a role in a tax shelter gifting arrangement."
"[I]n order to demonstrate that it is carrying on its own activity, a registered charity must maintain direction and control over the use of its resources. ... A properly structured agency or joint venture agreement can help demonstrate direction and control. Even when an agreement exists, however, the charity must ensure that it is monitored."
Neal Armstrong. Summaries of Cathy Hawara, Director General, Charities Directorate, "The CRA Charities Directorate's Approach to Compliance", 2014 Conference Report, Canadian Tax Foundation, 37:1-10 under s. 149.1(2), s. 149.1(1) – charitable organization, charitable foundation, ineligible individual, s. 149.1(1.1), s. 188.1(9).