News of Note
CRA rules that a foreign common contractual fund is a co-ownership arrangement rather than a unit trust
Email this ContentInvestors subscribe for units of “Subfunds” of an “Umbrella” fund, both situated in and governed by the laws of a redacted non-resident jurisdiction. The units are described both as a claim against the fund manager and as representing a co-ownership interest as tenant in common in the investment assets of a particular Subfund (with each Subtrust having a different focus as to the bonds or shares it invests in), which are managed by the non-resident fund manager on a discretionary basis and held by a non-resident custodian bank. A unit is specified to not "confer any interest or share in any particular part of the assets of the [funds]."
CRA ruled that the funds were fiscally transparent, so that a non-resident pension fund holding units in a Subfund that, in turn, held Canadian equities, could rely on its exempt pension fund status for Part XIII tax purposes.
This is similar to a less heavily redacted 2014 ruling on an Irish contractual fund (2013-0496831R3 – see also 2009-0345011R3 and 2006-0199741R3), whose description also looked somewhat similar to a unit trust, and was ruled upon to be a co-ownership arrangement.
Neal Armstrong. Summary of 2016 Ruling 2015-0606141R3 under s. 104(1).
Isah – Tax Court of Canada notes obiter that it can address incorrectly computed assessment interest
Imperial Oil indicated that the Tax Court has no jurisdiction to hear an appeal on the computation of refund interest. This is not to be confused with normal assessment interest, as to which Russell J stated:
[I]nterest relief [is] not a matter over which this Court has jurisdiction (unless the wrong interest rate was used or otherwise a wrong calculation of the interest was made, thereby affecting the balance of the appealed (re)assessment).
Neal Armstrong. Summary of Isah v. The Queen, 2018 TCC 28 under s. 171(1).
CRA states that an s. 247(2) transfer pricing adjustment for sales undercharges to a CFA does not decrease the ES of the CFA, nor imply a previous contribution of capital
The Directorate considered that where there was a s. 247(2) transfer pricing adjustment to increase Canco’s income as a result of having undercharged for goods or services provided to a non-resident subsidiary (CFA), s. 247(2) could not also be applied to reduce the exempt surplus or foreign accrual property income of CFA in respect of Canco.
Furthermore, the benefit associated with having undercharged could not be treated as a contribution of capital for purposes of an ACB increase to the CFA shares under s. 53(1)(c). (This CRA comment suggests that the current status of a comment made at the 1987 Annual CTF Roundtable (Q.68) - that on a share subscription, any cost basis denied by s. 69(1)(a) may be treated as a contribution of capital provided there is some increase in the value of the taxpayer's shares – may be uncertain.)
In passing, the Directorate indicated that if there were a transfer pricing adjustment under the foreign tax law, there could be a corresponding adjustment to CFA’s surplus, but stated:
[C]onsideration would have to be given to whether subsection 5907(2) … could reverse that foreign tax law adjustment and to the possible impact of any accompanying transfer of assets to effect a so-called “repatriation” payment.
Neal Armstrong. Summaries of 27 October 2017 Internal T.I. 2017-0694231I7 under s. 247(2), Reg. 5907(2) and s. 53(1)(c).
CRA indicates that a business limit is ground first based on taxable capital before it can be assigned
Under s. 125(5.1), the business limit is reduced on a straight-line basis if the total of the taxable capital of the Canadian-controlled private corporation in question and of associated corporations exceeds $10 million. CRA confirmed that any assignment of a CCPC’s business limit under s. 125(3.2) to another corporation can only occur after its business limit has first been ground under s. 125(5.1). There was no explanation as to why this question might have practical significance.
Neal Armstrong. Summary of 25 January 2018 External T.I. 2017-0709241E5 under s. 125(5.1).
Income Tax Severed Letters 7 February 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA has published all its answers at the 2017 Annual CTF Roundtable
Although we commented on most of the answers provided at the 2017 Annual CTF CRA Roundtable at the time, for convenience the table below provides brief descriptors for the final published CRA responses as well as links to those responses and our summaries thereof.
The split income rules do not apply to salaries
The split income rules, including in their proposed form, do not apply to salaries. Under the Gabco test, a salary is unreasonable if “no reasonable businessman would have contracted to pay such an amount having only [his] business considerations … in mind." This implies that:
[I]t may be justifiable and reasonable to pay a non-arm's-length person an amount in excess of an amount that would be paid to an arm's-length person if the non-arm's-length person exhibits, for example, a degree of loyalty and commitment that an arm's-length person could not….
Neal Armstrong. Summary of Alex Klyguine, "Income Splitting After the New Private Corporation Proposals: Salaries Paid to Family Members," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p.2 under s. 67.
A preferred/common unit structure in a Canadian partnership holding foreign affiliates can result in the loss of s. 113 deductions to the Canadian corporate partners
Although s. 93.1 provides a look through rule where Canadian corporations hold significant indirect interests in foreign corporations “through” a partnership, their ability under s. 93.1(2) to claim a deduction under s. 113(1) (e.g., for an exempt surplus distribution) is based on the relative fair market value of their partnership interest rather than the share of the dividend that in fact is distributed to them under the terms of the partnership agreement. This can result in a portion of the dividend not being deductible under s. 113 where the Canadian corporations hold units with differing dividend-sharing attributes, e.g., where the partnership has preferred and common units.
Neal Armstrong. Summary of Karthika Ariyakumaran and Michael Spinelli, "Holding a Foreign Affiliate Through a Partnership," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p.14 under s. 93.1(1).
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for six French technical interpretation released in January of 2014, as fully translated by us.
These (and the other full-text translations covering the last 4 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for February.
Oxford Properties – Federal Court of Appeal finds that using the s. 88(1)(d) bump on newly-formed rental property LPs to avoid indirect recapture income under s. 100(1) was abusive
When Oxford Properties was sold to an OMERS subsidiary, the purchaser first negotiated that Oxford would drop various properties down into LPs on a s. 97(2) rollover basis, with those partnership interests subsequently being bumped under s. 88(1)(d) (which, in 2001, did not prohibit bumping interests in partnerships holding appreciated buildings). After the acquisition, those bumped costs were then pushed down onto the cost of interests in property-specific LPs (which had been formed following the acquisition), by winding-up the upper-tier LPs under s. 98(3) and using the s. 98(3)(c) bump. After the three-year s. 69(11) period, some of the property-specific LPs were then sold to tax exempts.
Noël CJ reversed the findings of D’Arcy J that these transactions did not abuse ss. 97(2) and 100(1). Respecting s. 97(2), he stated that “the only reason why Parliament would preserve the tax attributes of property that is rolled into a partnership is to allow for the eventual taxation of the deferred gains and latent recapture,” so that a series of transactions that instead ensured “that deferred gains and recapture will never be taxed frustrates the object, spirit and purpose of subsection 97(2).” Somewhat similarly, he stated, respecting s. 100(1):
Parliament wanted tax to be paid on the latent recapture which would otherwise go unpaid on a subsequent sale of the depreciable property by the tax-exempt purchaser.
Given this, the inevitable conclusion is that the object, spirit and purpose of subsection 100(1) was frustrated by the result achieved in this case as the latent recapture in the depreciable property … will forever go unpaid.
Most interestingly, he found that the same broad brush that was applied in determining that the transactions were abusive insofar as they avoided recognition in taxable hands of recapture should also be applied to determine that GAAR should be applied only to recognize a taxable capital gain (effectively under s. 100(1)) equal to that recapture (of $116M) and not a taxable capital gain equal to the accrued capital gain on the buildings of $21M and the accrued capital gain on the land of $11M – i.e., “the Crown cannot have it both ways” and be able to apply s. 100(1) in a technical manner once, on broader grounds, it had been found to be abused. In this regard, he stated:
[F]ailure to recognize a cost that has been actually incurred but which would disappear on a vertical amalgamation or a partnership dissolution goes against the integrity of the capital gains system because it allows for the subsequent realization of a capital gain in circumstances where there has been no economic gain.
Neal Armstrong. Summaries of The Queen v. Oxford Properties Group Inc., 2018 FCA 30 under s. 245(4), s. 69(11), s. 88(1)(d) and s. 171(1).