News of Note
International Hi Tech – ITCs were lost because they had been claimed by the wrong group entity
Email this ContentA corporation (“Garmeco”) had made timely claims for input tax credits for GST on legal invoices (based on alleged advice of a CRA official that it was the right person to make the claims), but was found by the Tax Court of Canada not to be entitled to them. A subsidiary of Garmeco (“IHI”) then claimed the ITCs on the basis that the Tax Court judgment had found that it was the right party to make the claims.
Russell J has now found that IHI also was precluded from claiming the ITCs because it had made the claims beyond the four-year period set out in s. 225(4)(b) – so that the fact that its parent had made the claims on a timely basis did not count for anything.
Neal Armstrong. Summary of International Hi Tech Industries Inc. v. The Queen, 2018 TCC 531 under s. 225(4)(b) and General Concepts -Estoppel.
CRA indicates that Canadian residents who are subject to the U.S. transitional tax generally will not be entitled to a foreign tax credit
A U.S. citizen resident in Canada holds a controlling interest in a U.K. company. The U.S. imposes its one time transition tax on the "earnings and profits" of the U.K. company held at certain dates in 2017. CRA indicated that the individual would not be entitled to a foreign tax credit, given that the income in question was Subpart F income that did not qualify as income under the ITA, so that typically the formula in s. 126 would not work.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.12 under s. 126(1).
CRA finds that a tax-exempt Norwegian fund received a Canadian REIT distribution that was “taxable” in Norway, so that Treaty-reduced withholding applied
Art. 22(2) of the Canada-Norway Treaty provides that where a resident of Norway derives income falling under the Article from a source in Canada, Canada may tax that amount. However, it goes on to provide:
Where such income is income from a trust, other than a trust to which contributions were deductible, the tax so charged shall, provided that the income is taxable in the Contracting State in which the beneficial owner is a resident, not exceed 15 per cent of the gross amount of the income.
CRA stated:
[I]f a distribution from a Canadian-resident trust would otherwise be included in the Norwegian resident’s taxable income, but the recipient itself is, under Norwegian tax law, exempt from the imposition of income taxation, we would consider that the “income is taxable” for the purpose of paragraph 2 of Article 22. In contrast, if the distribution were made to a Norwegian resident that was otherwise taxable under Norwegian tax law but entitled under Norwegian tax law to exclude the distribution from income, the requirements of paragraph 2 would not be met.
CRA went on to find that since an income distribution from a Canadian REIT to a Norway resident was exempt in its hands because of a general exemption from Norwegian income tax rather than because of a specific exclusion of the distributions from its income, the income distribution was eligible for the Treaty-reduced rate of 15%.
Neal Armstrong. Summary of 28 March 2018 External T.I. 2016-0672941E5 under Treaties - Art. 22.
Emjo Holdings – Tax Court of Canada finds that “key man” insurance premiums on a universal life policy were non-deductible
A corporate borrower was required by its lender to take out key man insurance and assign the policy to the lender (a credit union). None of the premiums were deductible under s. 20(1)(e.2) for various reasons including that no evidence had been adduced to distinguish between the cost of the “universal life” policy in question and “the net cost of pure insurance”, the cost of which would be deductible under s. 20(1)(e.2)(ii). Smith J also indicated that s. 20(1)(e.2) required the deduction to “be correlated to the amount of the loan ‘owing from time to time’,” whereas here the amount owing had been reduced to approximately 10% of its original amount at the commencement of the first taxation year in question (so that any deduction would need to be prorated accordingly) and was repaid in full shortly thereafter (reducing any deduction to nil).
Neal Armstrong. Summary of Emjo Holdings Ltd. v. The Queen, 2018 TCC 97 under s. 20(1)(e).
Income Tax Severed Letters 6 June 2018
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CIBC World Markets – Tax Court of Canada finds that an ETA s. 150(1) election denied zero-rating for services provided to a parent’s non-resident branches
Administrative services provided by CIBC World Markets Inc. (WMI) to its parent (CIBC) respecting activities carried on by CIBC through its non-resident branches would have been zero-rated but for an ETA s. 150(1) election that had been made between them (which deemed services and licences of property supplied between members of the closely-related CIBC group to be exempt financial services). (Zero-rating would have generated input tax credits.) WMI made a subtle argument that although those non-resident branches were deemed non-resident persons respecting their branch activities for zero-rating purposes, they could not be members of a closely-related group to the extent of such activities.
Bocock J recognized that finding that the election denied zero-rating “renders a ‘sub-species’ of exported financial services less competitive.” Nonetheless, he found the statutory language deeming financial services following a s. 150 election to be exempt rather than zero-rate to be too emphatic and specific to accommodate what might have been the broader policy.
Neal Armstrrong. Summary of CIBC World Markets Inc. v. The Queen, 2018 TCC 103 under Schedule VI, Pt. IX, s. 1.
CRA finds that s. 75(2) does not apply to the deemed s. 104(4) capital gain arising in an alter ego trust on the life beneficiary’s death
CRA expanded on the discussion in 2017-0717831E5 by also discussing the treatment of a capital gain arising from the deemed disposition by an alter ego trust of capital property pursuant to s. 104(4) on the death of the beneficiary. CRA indicated that essentially s. 104(6) prevents a deduction to the trust for that taxable capital gain, so that it remains in the trust. Furthermore, if s. 75(2) applies, it does not attribute the gain to the beneficiary because the deemed disposition resulting from the beneficiary’s occurs at the end of that day, at which point there is not longer an individual in existence to whom the taxable capital gain can be attributed.
Neal Armstrong. Summaries of 29 May 2018 STEP Roundtable, Q.11 under s. 104(6)(b) – B – (i).
CRA confirms that an alter ego trust is entitled to a deduction for ordinary income distributions in the year of death
S. (i)(B)(I) of Element B in the formula in s. 104(6) ensures that no deduction is available to the an alter ego for any amount included in the trust’s income in the trust year ending with the death of the lifetime beneficiary because of the application of the deemed disposition rules in ss. 104(4) to (5.2). CRA agreed that, however, the alter ego trust is entitled to a deduction under s. 104(6)(b) for the amount of dividend income received by it that was made payable to that beneficiary prior to the death.
Neal Armstrong. Summary of 2 May 2018 External T.I. 2017-0717831E5 under s. 104(6)(b) – B – s. (i).
Iberville Developments – Tax Court of Canada finds that the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)
All you gotta do to offset the capital gain from a property sale is run the sale through a new partnership. For example, a taxpayer with a property with an adjusted cost base and fair market value of $20 and $120, respectively, contributes the property under s. 97(2) to a newly-formed LP in consideration for units with a FMV of $120. This is a barter exchange so that on general principles, the cost of the units is $120. S. 97(2)(b) provides that “immediately after” the disposition of the property to the LP, the elected amount of $20 “shall be added” to the ACB of the partnership interest, so that its ACB is now increased to $140. The property is sold by the LP at a gain of $100, which is largely allocated to the taxpayer, and the ACB of its interest thus is increased to $240. The taxpayer can then realize a capital loss on winding-up LP that more than offsets the capital gain that was realized on the sale.
In dealing with transactions that were only modestly more complex than these, Boyle J first found that the Quebec LP had been formed several hours before the time of the drop-down transaction, at the time that the limited partnership agreement was entered into. It was at that time that the taxpayer acquired its interest in the LP, so that its cost was nil. Partnership units are an irrelevancy under the scheme of the Act. Thus, it did not matter whether the taxpayer was issued additional units on the drop down – all it continued to have was a partnership interest with a nil cost, and with an ACB as increased only as contemplated under s. 97(2)(b) (i.e., to $20 in the above example).
Even if the taxpayer had managed to have the LP formed simultaneously with the drop-down transaction, Boyle J still would not have been persuaded. It was not at all clear to him that under the scheme of the Act, the cost of the taxpayer’s interest was to be determined at the very instant of the drop-down conveyance - rather than immediately after, when s. 97(2)(b) would govern.
It is unclear whether the reasoning in this case will give rise to interpretive difficulties where there are various contributing partners and the s. 97(2) rollover is not utilized. S. 97(1) does not explicitly deal with adjustments to the cost or ACB of a partnership interest – but Boyle J nonetheless helpfully stated that “subsection 97(1) … would be the specific rule which would provide that a transferor partner’s cost of their partnership interest is fair market value.”
Neal Armstrong. Summaries of Iberville Developments Limited v. The Queen, 2018 TCC 102 under s. 97(2)(b) and s. 97(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Technical Interpretation released in August and September 2013, as fully translated by us.
These (and the other full-text translations covering all “French” Interpretations released in the last 4 3/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. You are currently in the open week for June.