News of Note
CRA confirms that s. 132.11(4) requires backdating of December 31 income distributions by December 15 year-end MFTs even where their units were acquired in the stub period
Email this ContentApplication of the plain wording of ss. 132.11(4) and 132.11(5)(c) can produce an odd result. Where, in the last 16 days of December, a mutual fund trust, which has elected a December 15 year end under s. 132.11(1), acquires some units of another mutual fund trust that also has elected a December 15 year end, an income distribution payable by the acquired trust on December 31 (presumably out of post-December 15 earnings) will be deemed to have been received by the top trust in its year that had already ended on December 15, notwithstanding that it was not a beneficiary of the acquired trust at that time.
Neal Armstrong. Summaries of 17 May 2016 T.I. 2014-0546831E5 under s. 132.11(4) and s. 132.11(3).
CRA confirms that no T1135 filing is required of a non-resident portion trust (or by a particular trust not holding foreign property)
S. 94(3)(f) provides for an election which effectively permits a (s. 94) deemed non-resident trust to elect to bifurcate itself into a “non-resident portion” trust (in broad-brush terms, holding property that has not been contributed by current or former residents of Canada) and the “particular trust” (holding the tainted property). CRA considers that neither of these two deemed subtrusts is required to report foreign property on T1135s provided that all the foreign property is held in the non-resident portion trust rather than the particular trust.
Neal Armstrong. Summary of 27 June 2016 T.I. 2014-0532601E5 under s. 94(3)(f).
Golini – Tax Court of Canada finds that a loan to a shareholder with recourse limited to an asset pledged by the corporation was a shareholder benefit (and an abuse of s. 84(1) when the loan was used to acquire high-PUC shares)
A simplified description of a “structured transaction” is that Opco used proceeds of a daylight loan to redeem shares of Holdco, which used those proceeds to purchase a life insurance policy (or, to be more precise, to purchase an annuity to fund the premiums on the acquired policy) from an accommodating offshore insurance company, with those funds making their way back, through a series of equally accommodating intermediaries, to the sole individual shareholder of Holdco (“Paul Sr.”) as a loan. This loan was guaranteed by Holdco, with the guarantee secured by Holdco’s life insurance policy. The loan terms limited the lender’s recourse thereunder to realization of such security.
In finding that most of the loan amount was a shareholder benefit, given that “Holdco has agreed to use insurance proceeds from a policy it owns to pay off its shareholder’s debt,” C. Miller J stated
The transactions were structured such that there would be no sensible reason for Paul Sr. to repay the loan. Everyone’s understanding was the annuity and insurance were the only manner in which the obligation of the… loan would be met… .
He did not consider it necessary, in order to reach the above conclusion, to consider that there had been an absolute assignment of the insurance policy by Holdco to the lender at the time of the loan – but considered that, in any event, the purported non-absolute assignment of the policy was a sham, which further buttressed his finding of a shareholder benefit. However, in referring to a clause in the purchased annuity contract which incorrectly indicated that there was a potential investment return on the annuity, he stated that
Although there has been a misrepresentation, my view is that to void the entire transaction as a sham transaction because of a misrepresentation that is not fundamental to the nature of the annuity extends the concept too broadly.
He also found that the 8% interest on the loan (which he appeared to consider to be in excess of a reasonable rate of 5.5%) was deductible in full, but that there was an offsetting shareholder benefit to the extent this interest was capitalized, so that Paul Sr. only received a net interest deduction for the portion of the interest (equivalent to about a 1.33% rate) paid by him in cash.
Paul Sr. used the loan proceeds to acquire shares of Opco with full paid-up capital, with Opco paying off the daylight loan. C Miller J found that if it had been necessary to rely on GAAR, he would have found “there is an abuse of the underlying policy of subsection 84(1).”
Neal Armstrong. Summaries of Golini v. The Queen, 2016 TCC 174 under s. 15(1), s.20(1)(c), s. 245(4), General Concepts – Sham.
Joint Committee Submission on B2B and s. 212.1(4) rule
The Joint Committee has provided very detailed submissions on the current back-to-back (B2B) loan rules and their proposed expansion in the 2016 Budget to rents, royalties and similar payments and on the narrowing of the exception in s. 212.1(4) from the s. 212.1 surplus-stripping rule.
Neal Armstrong. See Joint Committee submissions.
Income Tax Severed Letters 27 July 2016
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that late-filed ETA s. 156 elections will not be accepted if there was negligence or GST/HST in fact was charged
Since 2014, GST/HST nil consideration elections under ETA s. 156 have been required to be filed with CRA rather than just stuffed in a filing cabinet. CRA has now published a Policy on when it will accept late-filed elections, which in addition to other more mechanical or obvious criteria, specifies that the parties must have consistently treated their inter-group supplies as having been made for nil consideration from the requested effective date onwards, the request for the late filing must “provide a clear explanation as to why the specified members have filed the election… late,” and “the parties to the late-filed election...must not have been negligent or careless in complying with the provisions of section 156.”
This last point is reinforced by an example which concludes with the comment:
The request would generally be accepted where the explanation as to why the election was filed late demonstrates that the parties were not negligent or careless in complying with the election provisions.
Similar criteria apply to a late-filed request for revocation of an election.
Neal Armstrong. Summary of P-155 under ETA s. 156(4)(b)(ii).
The international shipping non-residency exemption may cause a deemed exit tax for foreign shipping companies which had nil income in a prior year
There are some unresolved rules relating to the Canadian international shipping rules:
- The branch exemption found in s. 81(l)(c) only provides that the international shipping income earned by the foreign taxpayer is not included in income – it does not provide that the company is not carrying on business in Canada, thereby potentially resulting in an obligation for a large international shipping company to file hundreds of nil returns.
- It is not clear whether a foreign company can satisfy the revenue tests in s. 250(6)(b) if it happens to have nil revenue in a year, as might occur if its only assets are vessels under construction, or shares in vessel operating companies that do not pay any dividends in the year. If, as a result of this problem, it is considered to be resident in Canada, then in a subsequent year when it earns income qualifying it as a deemed non-resident of Canada under s. 250(6)(b), it will be treated as migrating from Canada, thereby triggering tax on accrued gains.
Neal Armstrong. Summaries of Michael Shields, "Taxation of International Shipping Companies in Canada," International Tax, Wolters Kluwer CCH, No. 88, June 2016, p. 1 under s. 81(1)(c) and s. 250(6)(b).
Failing to repay a grandfathered upstream loan by August 19, 2016 will, at best, require the Canadian corporate recipient to claim perennial reserves against inclusions based on its August 20, 2014 attributes
If an upstream loan that was made before August 20, 2011 is not repaid by the August 19, 2016 deadline for doing so, the Canadian-taxpayer recipient of the loan will be required to include its amount in income on August 20, 2014. If the taxpayer is a Canadian corporation, it will need to determine its surplus and basis attributes as at August 20, 2014, for purposes of any s. 90(9) reserve.
If these attributes as at August 20, 2014 are ultimately used to shelter any actual foreign affiliate dividend or other distribution, or are subsequently earmarked to shelter any other upstream loan, the Canadian corporation will lose its continued entitlement to the subsection 90(9) deduction and may find it necessary to actually repay the grandfathered upstream loan so as to instead claim a terminal deduction under subsection 90(14).
Neal Armstrong. Summaries of Geoffrey S. Turner, "Transitional Tax Treatment of Grandfathered Upstream Loans – Repayment Deadline Approaching," International Tax (Wolters Kluwer CCH), No. 88, June 2016, p. 7 under s. 90(9), s. 90(8)(a) and s. 39(2.1).
Gerbro Holdings – Tax Court of Canada finds that offshore hedge fund investments were chosen in the main for commercial reasons (e.g., manager reputation), so that s. 94.1 did not apply
The investment guidelines governing a privately-held Canadian investment company mandated its holding up to 60% of its funds in hedge funds. Although the hedge funds in which the company invested were in low tax-rate jurisdictions, Lamarre ACJ accepted that tax deferral was not “one of the main reasons” for acquiring these investments and that there instead was an “overarching commercial reason for investing" in these funds, e.g., the reputation of the hedge fund managers – and these offshore funds were selected as being the best choices. Accordingly, those investments were not subject to the offshore investment fund rules in s. 94.1.
Neal Armstrong. Summary of Gerbro Holdings Co. v. The Queen, 2016 TCC 173 under s. 94.1(1).
CRA finds that 25% Part XIII tax applies to interest paid by a transparent ULC (held through a QSSS by an S-Corp) to the S-Corp
Where an S-Corp makes an interest-bearing loan to a Nova Scotia ULC held by it through a qualified Subchapter S subsidiary, the interest paid on the loan will not be eligible for Treaty benefits under the anti-hybrid rule in Art. IV, 7(b): the interest will be disregarded for U.S. purposes, given the fiscally transparent nature of the ULC and QSSS; whereas the interest would be regarded for such purposes if the ULC were not transparent, i.e., the hybrid status of the ULC and QSSS affects the Code treatment of the interest.
This written response is clearer than an oral response given at the 26 May IFA Roundtable, which referred to the S-Corp parent as being “fiscally transparent” and to the “interest…effectively being paid by the U.S Parent (or its members) to itself.” Thus, in contrast to the oral response, which potentially was confusing on this count, the written response is consistent with the longstanding CRA view that S Corps can qualify for Treaty benefits (assuming that, unlike this example, Art. IV, 7(b) does not apply.)
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 9, 2016-0642131C6 under Treaties – Art. 4.