News of Note
Pawlak - Tax Court finds that CRA must allow stale-dated ITC claims on late-filed GST/HST returns
Email this ContentThe GST/HST "audit to net tax provision" (s. 296(2)) indicate that when the Minister assesses a registrant on audit, the Minister is required to take into account any unclaimed input tax credits that were available for the applicable reporting period in making that assessment. Webb J has extended this provision to also apply to the situation where a registrant has filed GST or HST returns beyond the normal limitations period for claiming ITCs for the reporting period in question (two or four years, depending on the type of registrant) - so that, in this case, the registrants, on filing returns very late, were entitled to ITCs well in excess of the taxable supplies made in the applicable reporting periods.
Neal Armstrong. Summary of Pawlak v. The Queen, 2012 TCC 355 under ETA s. 296(2).
Erdene tax disclosure points out potential trap on s. 86 reorganziations of junior mining companies
Erdene is spinning out a majority-owned public company subsidiary (APM) on a section 86 reorganziation. The Canadian tax disclosure points out that where Erdene shareholders' only shares only are flow-through shares, the section 86 rules will produce a capital gain equal to the full fair market value of the APM shares that are distributed to them, given the nil adjusted cost base of their flow-through shares.
Neal Armstrong. Summary of Erdene Circular under s. 86 reorganization spin-offs.
Spruce Credit Union - Tax Court finds that a distribution of needed corporate funds is not an avoidance transaction
General anti-avoidance rule cases usually turn on the question whether there was an abusive transaction. Quite unusually, the Tax Court has found that the distribution of funds of a deposit insurance corporation to its credit union shareholders in a manner that accessed the inter-corporate dividend deduction was not an avoidance transaction, so that Boyle J did not even have to get to the question of abuse.
CRA clearly was bothered by the fact that the dividend in question was paid out of tax-free assessments previously received by the deposit insurance corporation from its members - and the distribution of its funds could have been designed in a different way in order to avoid the "inappropriate" result of these amounts also being distributed free of tax. Nonetheless, the dividend payment itself (which Boyle J emphasized was the only transaction he had to consider) clearly had a primary non-tax purpose - they needed the money! Therefore: no avoidance transaction.
Neal Armstrong. Summaries of Spruce Credit Union v. The Queen, 2012 TCC 357 under s. 245(3) and s. 137.1(4)(c).
CRA forwards question about NYSE MKT's designated stock exchange status to Finance
CRA indicated that it would consult the Department of Finance as to whether Finance would add NYSE MKT to the list of designated stock exchanges (which is relevant, inter alia, for RRSP eligibility).
Scott Armstrong. Summary of 24 August 2012 T.I. 2012-0436031E5 under s. 262.
CRA characterizes referral fees as royalties rather than business profits
CRA considers that customer referral fees paid by a Canadian insurance broker to a US insurance broker likely should be characterized as payments for "information concerning... commercial... experience," so that the withholding tax that otherwise would apply under s. 212(1)(d)(ii) will be relieved by the Royalties Article of the Canada-US Income Tax Convention.
Neal Armstrong. Summary of 21 September 2012 T.I. 2012-0457951E5 under Treaties - Art. 12 and s. 212(1)(d)(ii).
CRA issues favourable ruling on ULC-to-S Corp PUC increase and distribution
CRA has issued a ruling that the anti-hybrid rule in the Canada-US treaty does not apply where a Canadian ULC (which is "sandwiched" between its S-Corp US parent and indirect LLC and qualified S subsidiaries) increases the paid-up capital of its shares, and then makes a cash distribution of that paid-up capital - so that the dividend is eligible for the Treaty-reduced rate of 5%.
Neal Armstrong. Summary of 2012 Ruling 2011-0430761R3 under Treaties - Art. 4.
CRA characterizes cloud software access fees as fees for services
A taxpayer inquired about whether fees paid to a non-resident for access to "an on-line marketplace trading platform" ("similar to eBay" - and using "cloud software") were royalties under s. 212(1)(d)(i), and therefore subject to withholding tax.
CRA's reply was that the fees would not be considered royalties under the OECD Model Convention and instead would be business profits. Although CRA's response rather oddly jumped directly to Treaty interpretation even though the question was directed to the interpretation of the domestic withholding provision, it is implicit that CRA regards the "licence fee" for the provision of such cloud software as fees for "the provision of digital services" rather than as a royalty described in s. 212(1)(d)(i).
Scott Armstrong. Summary of 2 August 2012 T.I. 2011-0422781E5 under s. 212(1)(d)(i).
Income Tax Severed Letters 24 October 2012
This morning's release of 17 severed letters by the Income Tax Rulings Directorate is available for your viewing.
CRA confirms that the s. 156 GST/HST election may be available on an asset transfer to a Newco
In its new Memorandum on the intra-group election for nil consideration (s. 156), CRA indicates that it is available for the transfer of assets by an existing exclusively-commercial registrant to a "Newco" subsidiary, provided that before the transfer the Newco is doing something in connection with a proposed exclusive commercial activity. If so, it qualifies as engaging in that commercial activity, and can register, make the election and receive the assets free of GST or HST. This can be useful if there are issues as to the availability of the s. 167 election on a drop-down transaction.
Neal Armstrong. Summary of GST/HST Memorandum 14.5 "Election for Nil Consideration" September 2012 under ETA, s. 156(1).
Nord Gold offer for High River is structured to avoid the new foreign affiliate dumping rules
Nord Gold N.V., which currently holds about 75% of the shares of High River Gold Mines Ltd. (a Canadian TSX-listed company with Russian and African mining subsidiaries), is making a direct offer for the remaining High River shares of the public in exchange for cash or Nord Gold GDRs, rather than using a Canadian Acquisitionco. This avoids engaging the indirect acquisition rules under the new foreign affiliate dumping rules (in draft s. 212.3(10)(f)).
Consistently with there being no Acquisitionco, the Canadian tax disclosure contemplates that any subsequent acquisition transaction might take the form of the acquisition of the untendered shares for cash or Nord Gold GDRs under a plan of arrangement rather than those shares being converted and redeemed under an amalgamation squeeze-out.
Neal Armstrong. Summary of Nord Gold offer under Mergers and Acquisitions - Cash and Equity Offers.