News of Note
Poulin – Tax Court of Canada finds that a sale to the special-purpose Holdco of an independent employee was essentially a surplus-stripping transaction rather than an arm’s length sale
Email this ContentCRA successfully applied s. 84.1 to a transaction in which one of the two major shareholders of a Quebec CCPC (Mr. Turgeon) agreed to sell some preferred shares of the CCPC to a newly formed Holdco of its comptroller (“Hélie Holdco”) in consideration for a promissory note bearing interest at 4% and which was to be repaid over a number of years out of dividends or redemption proceeds received by Hélie Holdco from the CCPC. D’Auray J noted that this employee had no risk, and Hélie Holdco had no upside as its only assets and liabilities were the prefs and the note, both with frozen values – so that Hélie Holdco essentially was just an accommodation party. She stated:
Hélie Holdco served only to participate in the transaction for the benefit of Mr. Turgeon, thereby permitting him to strip the surplus of [the CCPC] free of tax by virtue of utilizing the capital gains deduction.
At the same time as Mr. Turgeon was arranging this “sale” to Hélie Holdco, he formed a new Holdco to purchase preferred shares of the other major shareholder. D’Auray J found this to be an arm’s length transaction (so that s. 84.1 did not apply) even though it occurred on quite similar terms (under advice from a common tax advisor) as the sale to Hélie Holdco, as they each were advancing their own interests (arranging an exit on advantageous terms, and acquiring control of the CCPC, respectively.)
Neal Armstrong. Summary of Poulin v. The Queen, 2016 CCI 154 under s. 251(1)(c).
CRA indicates that recapture of depreciation or eligible capital amounts realized on sales occurring before the safe-income determination time will be included in safe income
Under s. 55(2) (and draft s. 55(2.1)(c)), it is only safe income realized before the safe-income determination time which can be accessed. This creates a technical difficulty in the case of recapture of depreciation and eligible capital amounts, which are stated to arise only at the end of the taxation year in which the related dispositions occurred.
However, CRA has indicated that it nonetheless will accept that such income arose before the safe-income determination time if the sale giving rise to such income occurred before that time – and similarly for terminal losses.
Neal Armstrong. Summary of 20 April 2016 T.I. 2016-0633961E5 Tr under s. 55(2.1)(c).
Univar – Tax Court of Canada finds that creating a sandwich structure to access s. 212.1(4) was an abuse of the s. 212.1(1) anti-surplus stripping rule
A non-resident's acquisition of the shares of a Netherlands public company indirectly holding the shares of a valuable Canadian sub (Univar Canada) with nominal paid-up capital was structured to effectively step-up the PUC of the shares of Univar Canada to fair market value by using (or, according to V. Miller J, abusing) the pre-2016 version of s. 212.1(4) rule. This was accomplished by setting up a sandwich structure immediately after the acquisition, under which a new Canadian ULC, capitalized with notes and high-PUC shares, held the shares of a U.S. corporation holding Univar Canada – so that such U.S. corporation could distribute the shares of Univar Canada (on a Treaty-exempt basis) to its controlling Canadian purchaser (the ULC) without technically being affected by the s. 212.1(1) deemed dividend rule.
Her analysis in confirming CRA's application of GAAR (to impose Part XIII tax on the value of the notes issued by the Canadian ULC and to grind the PUC of the shares issued by it) was informed by her starting point, which was to state:
Subsection 212.1(4) is placed as an exception within an anti-avoidance section… . [I]t is reasonable to infer that subsection 212.1(4) cannot be used so that it would defeat the very application of section 212.1. …[S]ubsection 212.1(4) is aimed at a narrow circumstance where the purchaser corporation, which is resident in Canada, actually controls the non-resident corporation without manipulating the corporate structure to achieve that control.
She went on to say:
The exception should not apply in the situation where a non-resident owns shares of the Canadian resident purchaser corporation.
so that effectively she regarded the proposed amendments to s. 212.1(4) in their principal aspect as being enacted for greater certainty – and, in fact, she referred to these amendments as evidencing the policy of the old s. 212.1(4) rule (which might be at odds with s. 45(3) of the Interpretation Act – although she cited Water’s Edge as permitting this approach).
Neal Armstrong. Summaries of Univar Holdco Canada ULC v. The Queen, 2016 TCC 159 under s. 212.1(4), s. 245(4) and Statutory Interpretation - Interpretation Act, s. 45(3).
Kruger – Federal Court of Appeal finds that non-statutory mark-to-market accounting was permissible under s. 9, and that derivatives not held for resale are not inventory
Kruger engaged in extensive trading of FX options, mostly writing European style puts and calls, although it also purchased FX options.
Noël CJ found that Kruger was entitled to use mark-to-market accounting for tax purposes in recognizing a loss on its FX option position for its 1998 year, stating:
[T]he mark to market method is consistent with well accepted business principles….[T]he realization principle can give way to other methods of computing income pursuant to section 9 of the Act where these can be shown to provide a more accurate picture of the taxpayer’s income for the year… . Canadian General Electric is in direct contradiction with the Tax Court judge’s holding that realization is an overarching principle… .
He went on to indicate the option contracts written by Kruger were not inventory (as they instead were liabilities) and that the option contracts purchased by Kruger also were not “inventory” as the s. 248(1) definition thereof had an implicit requirement that, to qualify as inventory, property must be held for sale (so that the purchased options were “a type of property that is neither capital property nor inventory.”) Accordingly, the mark-to-market tax accounting of Kruger occurred strictly under s. 9.
This case will put the banks and other financially regulated enterprises on a more comfortable footing given that, in 2012, CRA indicated (in 2008-0289021E5) that it may no longer accommodate non-statutory mark-to-market accounting.
A procedural oddity: the reassessment of CRA added back $72M to Kruger’s income for 1998, being the difference between its claimed mark-to-market loss on its options of $91M, and the 1998 amortization as to $19M of net option premiums. Noël CJ considered that premium amortization did not accord with mark-to-market accounting, and directed CRA to reassess on the basis that Kruger was entitled to use the mark-to-market accounting, but without deferring or amortizing any portion of the premiums paid or received during 1998. This might effectively be a direction to reduce Kruger’s taxable income to below that originally reported.
Neal Armstrong. Summaries of Kruger Inc. v. The Queen, 2016 FCA 186 under s. 9 – timing, s. 248(1) – inventory.
Coast Capital – Federal Court of Appeal rejects an apparent attempt to argue that an inflated purchase price should be bifurcated between a FMV cost and a benefit conferral
The trustee of RRSPs was duped into purchasing shares of Canadian companies from offshore entities at a price substantially in excess of their value, so that funds of the RRSPs effectively were stripped to offshore accounts. The trustee sought to amend its Notice of Appeal, from an assessment for failure to withhold under s. 116(5), by adding an assertion that the purchase transactions were shams.
In denying this request, V. Miller J in the Tax Court had stated: "in a tax case, a court will make a finding of ‘sham’, only when it is the Minister who is deceived." Gleason JA affirmed on the narrower ground that any deception of the trustee was irrelevant to the assessment, which turned only on the trustee having purchased taxable Canadian property shares from a non-resident.
The trustee also sought an amended pleading that the cost to it of the shares was their fair market value, apparently intending to argue that the purchase price in excess of the shares’ fair market value should instead be construed as the “conferral of a benefit to the annuitants and the promoters,” rather than as cost of the shares (so that s. 116(5) withholding only applied to the modest FMV). Gleason JA (like V. Miller J below) found that this approach (implicitly of bifurcation) flew in the face of the Stirling doctrine as to the meaning of “cost.”
Neal Armstrong. Summaries of Coast Capital Savings Credit Union v. Canada, 2016 FCA 181 under General Concepts – Sham and s. 116(5).
CRA indicates that gains and losses on interest rate hedges can be treated asymmetrically
Headquarters indicated that Weston has not affected its view that losses or gains realized on contracts (referred to by it as “bond locks”) entered into to hedge interest rates (or, in this case, also obligations to pay preferred dividends) were on income account.
It went on to note that as the benefits of the Bond Locks “are primarily related to the interest stream on the Debentures and the dividend stream on the…Preferred Shares” and (unlike Canderel) no immediate benefits were identified, “there is a good case to be made” that losses realized on the interest rate hedges should be amortized over the term of the hedged debentures.
When asked if any gains on the hedges should be amortized as well, Headquarters responded that “Ikea specifically states that there is no possibility of an amortization of income.”
Neal Armstrong. Summaries of 21 October 2015 Memo 2015-0592781I7 under s. 9 – capital gain v. profit – Futures/Forwards/Hedges, and s. 9 – timing.
CRA determines a services PE of a U.S. partnership based on the collective Canadian activities of all its partners
Under the services PE definition in the Canada-U.S. Treaty (Art. V(9)), a U.S. “enterprise” can have a Canadian permanent establishment if (a) it derives more than 50% of its revenues in a 12-month period from services of an individual present in Canada for at least 183 days in that period, or (b) it performs services in Canada on a project for a Canadian client for at least 183 days in a 12-month period. CRA considers that the determination of whether a U.S. (or other non-resident) partnership has a Canadian PE is made at the partnership level – but by reference to the activities carried on by each partner through the partnership.
For example, if only one of the two U.S. partners of a U.S. partnership is present in Canada working on a project for a Canadian client (thereby generating more than 50% of partnership revenues) but that presence exceeds the 183-day presence test under the (a) test, the partnership and, thus, both partners will have a Canadian PE under Art. V(9), so that the second partner will also be subject to Canadian tax on the income attributable to that PE.
Under the para. (b) test, if they each provide services in Canada for less than 183 days but collectively exceed this threshold, the same result obtains.
Neal Armstrong. Summary of 14 December 2015 Memo 2014-0558661I7 under Treaties – Art. 5.
Income Tax Severed Letters 22 June 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
National Exhibition Centre – European Court of Justice finds that a fee for arranging for credit card payments for tickets was not exempt from VAT
The owner of a British exhibition centre (“NEC”) sold tickets on behalf of third parties holding events at the centre. Where the customers paid by credit card, NEC increased the ticket prices by about 10%, and retained this amount as a booking fee.
The U.K. Upper Tribunal referred a question to the European Court of Justice respecting whether the card processing services of NEC were VAT-exempt payment services. Before answering, the Court questioned whether the NEC booking fees were consideration for a separate supply, stating that it previously had held “that the additional charges invoiced by a service provider to its customers, where the latter pay for those services by credit card…do not constitute consideration for a supply of services distinct and independent from the principal supply of services in respect of which that payment was made.” The Court did not explain how there could be a single supply and two suppliers (NEC supplying a card-processing service, and the third parties supplying tickets).
Turning to the question posed, the Court held that there was no exempt financial service because NEC did not debit or credit the customer’s account or otherwise provide a direct payment service but instead was merely involved in the exchange of information with its correspondent bank who, in turn, exchanged information with the card-issuer bank. This reasoning may suggest that it was crucial in Global Cash Access that Global actually issued its own “cheques” rather than merely facilitating payments by others.
Neal Armstrong. Summaries of HMRC v National Exhibition Centre Ltd., [2016] BVC 19 under ETA – s. 123(1) – supply, s. 123(1) – financial service – para. (a).
CRA confirms that its rulings for the multiplication of the small business deduction by professionals’ service corps will cease to apply
The 2016 Budget will extend the specified partnership income rules to the structures in which the CCPCs of professionals or their family provide services to a partnership of which the professional is a member (and there is a comparable proposal for private corporate structures). Needless to say (but someone asked anyway):
With respect to any advance income tax rulings involving such partnership reorganization structures…any advance income tax rulings issued by the CRA will cease to bind the CRA on the coming into force of the proposed legislation.
Neal Armstrong. Summary of 6 May 2016 T.I. 2016-0646411E5 under s. 125(7) - specified partnership income.