News of Note
Quinco Financial – Tax Court confirms gap in the HST/GST credit note rules
Email this ContentThe HST/GST credit note rule provides that where a registrant receives a credit note for a taxable purchase made by it, any HST or GST included in that credit note will be added to its net tax liability for the reporting period in which it received the credit note to the extent that it had claimed an ITC for the related purchase in its return for that or a preceding reporting period. The legislative drafter missed the point that ITC claims can be deferred for months or even years following the month in which the original purchase occurred, so that it is quite possible that the related ITCs will not be claimed until a return for a reporting period following that in which the credit note was received.
D'Auray J. has confirmed this legislative gap, so that the registrant got full ITCs for the GST on its original purchases notwithstanding that it subsequently received credit notes for $2.3M of those claims.
Neal Armstrong. Summaries of Quinco Financial Inc. v. The Queen, 2013 TCC 20 under ETA s. 232(3) and 298(4).
CRA finds that a share exchange is not a disposition
CRA considers that the exchange of shares held in street name in a Canadian account and listed on the TSX for identical shares listed on the NYSE and held in an American account, through some sort of off-market transaction which is internal to the investor's brokers, does not constitute a disposition of the shares. Although this interpretation might seem surprising, it is not far removed from the well-accepted view that the existence of a shareholding as property does not depend on it being evidenced by share certificate(s).
Neal Armstrong. Summary of 5 October 2012 APFF Round Table Q. 22, 2012-0455431C6 F under s. 248(1) - disposition.
Is a surviving spouse affiliated with the deceased?
Where an individual transferred a depreciable property with an accrued terminal loss to his spouse at fair market value, then died before being able to claim full CCA on the amount of that loss under the notional depreciable property rule in s. 13(21.1), CRA considers that such residual loss amount is vaporized because none of the release events in ss. 13(21.2)(iii)(A)-(E) applies.
This is questionable. His wife presumably ceased to be affiliated with him when he died. It likely follows that he was deemed immediately before that time to cease to own the notional depreciable property (under the "A" release event). Accordingly, at the end of his last taxation year (i.e., December 31 if you take the calendar year rule in s. 249(1)(b) at face value) he would recognize a terminal loss as he would no longer be deemed to own the notional property at that time.
Neal Armstrong. Summary of 7 January 2013 T.I. 2012-0452611E5 under s. 13(21.2).
Milestone Apartments REIT will be a dual (Canadian/U.S.) REIT
Milestone Apartments REIT, a Canadian REIT, will be a U.S. corporation under the Code s. 7874 anti-inversion rules. However, it will elect to also be a U.S. REIT so as to avoid U.S. corporate income tax.
Neal Armstrong. Summary of Milestone Apartments REIT under Cross-Border REITS.
CRA confirms consequences of debenture interest suspension where there is no suspension of due dates
A corporation which suspended interest payments on its debenture during the year is described as issuing T5 slips for "all amounts due and payable in the year including unpaid interest." If this in fact is what happened, CRA is correct that individuals reporting on a receivable basis would be required to include the full year's interest in their income (but with there being a potential doubtful or bad deduction available under s. 20(1)(l) or (p)). However if, as is commonly the case for subordinated debentures, there was a right or requirement to suspend the due date for the interest payments (in order to protect more senior debt), then the suspended accrued interest would only be required to be included in income to the extent it was covered by the anniversary date rule in s. 12(4).
Neal Armstrong. Summary of 20 November 2012 T.I. 2012-0449671E5 under s. 12(4).
Income Tax Severed Letters 30 January 2013
This morning's release of 19 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
First Majestic acquisition of Orko includes a sole survivor amalgamation for U.S. tax reasons
First Majestic is acquiring all the shares of Orko under a B.C. plan of arrangement in consideration for First Majestic shares (and also for nominal cash, in order to bust the s. 85.1 rollover).
Orko then is being merged under the plan of arrangement with a subsidiary of First Majestic in an amalgamation in which, for U.S. tax reasons, Orko is the sole surviving corporation (i.e., it isn't the continuance two-rivers-coming-together type of amalgamation that would have occurred under the B.C. Business Corporations Act - see Envision Credit Union, under appeal). CRA has ruled that this type of amalgamation qualifies under s. 87 as a good amalgamation notwithstanding language that arguably is suggestive of a requirement that the amalgamation result in a new corporation (2006-0178571R3, see also 2010-0355941R3 and Henry Chong).
Neal Armstrong. Summary of Orko circular under Mergers - Shares for Shares and Nominal Cash.
Prudential - UK Supreme Court confirms that tax advice from accountants is not privileged
The UK Supreme Court (formerly the House of Lords) has confirmed by a 5-2 majority that legal advice privilege does not extend to tax advice provided by an accounting firm. Lord Neuberger intimated that, "as a matter of pure logic," the privilege should attach to communications by non-lawyers "with a qualification or experience which enables them to give expert legal advice in a particular field," but was reluctant to depart from the existing understanding of the doctrine.
The finding in the case (but not the "logical" allure of going the other way) is consistent with Canadian judicial statements (see Baron, Susan Hosiery and Kitsch), although the issue has not been addressed in the Supreme Court.
Scott Armstrong. Summary of R. (Prudential plc & Anor) v. Special Commissioner of Income Tax & Anor, [2013] UKSC 1 under s. 232(1) - "solicitor-client privilege."
Keegan/PMI "merger of equals" addresses Canadian, Australian and U.S. shareholder issues
Keegan (a B.C. corporation listed on the TSX and NYSE MKT) will be acquiring all the shares of PMI (a B.C. company listed on the TSX and ASX) in consideration for Keegan shares, in what is styled as a merger of equals. The transaction should produce a rollover for most Canadian and Australian shareholders of PMI.
However, PMI is a PFIC, as will Keegan (renamed Asanko) after the merger. Although not directly disclosed, it may be that the transaction was structured as an acquisition by Keegan rather than the reverse in order to minimize adverse consequences to the U.S. shareholders of Keegan on the merger itself.
In the case of any U.S. shareholders of PMI, a proposed Code regulation respecting PFIC-for-PFIC exchanges may provide relief.
Neal Armstrong. Summary of Keegan/PMI Joint Circular under Mergers - Share-for-Share.
Dixie Energy Trust uses s. 86 reorganization to effect de facto liquidation of a cashco
In a tiny but unusual transaction, a public company ("VisionSky," or "VKY") whose only significant asset is cash resulting from a sale of its business over two years ago (i.e., beyond the time limit in draft s. 84(4.1)) is effectively being liquidated into Dixie Energy Trust - which holds US oil and gas exploration assets through an Argent Energy/Meranex Energy structure.
VKY will engage in a plan of arrangement in which its shareholders will exchange their voting common shares for this cash and for new non-voting common shares of VKY(presumably having nominal value). This is described as a s. 86 reorg - and there's no deemed dividend as there's lots of paid-up capital. Ignoring convoluted transactions pursuant to which they get rid of those non-voting common shares to Dixie Energy Trust, they then simply transfer that cash under the plan of arrangement to the Trust in consideration for Trust units.
In order that the Canadian holding company through which the Trust holds the US structure will not be "tainted" as non-portfolio property under the "SIFT" taxation rules, the stripped-out VKY corporate shell is to be held by the Trust directly.
Neal Armstrong. Summary of VisionSky Circular under REIT and Income Fund Acquisitions - Acquisitions of Corporations.