News of Note
CRA loss-shifting ruling contemplates a limited-recourse loan to Profitco
Email this ContentA triangular intercorporate loss-shifting transaction (under which Profitco borrows on an interest-bearing basis from Lossco, subscribes for pref of a Newco subsidiary of Lossco, and Newco lends the money back on a non-interest-bearing basis to Lossco) contemplates that the only recourse under the loan of Lossco to Profitco will be to the pref of Newco, and that Profitco may satisfy the loan to it by delivering the Newco pref (irrespective of their value).
Neal Armstrong. Summary of 2012 Ruling 2012-0439191R3 under s. 111(1)(a).
Bakorp - Tax Court finds that a "180 degree turn" in the relief requested by a large corporation at the appeal stage was not "a mere change in quantum"
The taxpayer's Notice of Objection indicated that the Minister had erred in reducing the amount of a deemed dividend from $53 million to $28 million for its 1995 taxation year, but its Notice of Appeal stated that the deemed dividend for 1995 should have been nil instead (so that such amount instead should have been included in a prior year's return).
The taxpayer, as a large corporation, was subject to the requirement in s. 169(2.1) that it could only appeal on an issue raised in its Notice of Objection. It argued that, at both the Notice of Objection and Appeal stages, it was raising the same issue, namely, the quantum of the deemed dividend for that year. After stating that "there may be situations where change in quantum may not involve Large Corporation Rules," C Miller J stated that "I cannot imagine a fuller reconstruction than making a 180 degree turn in what is to be included in income." The taxpayer's appeal for 1995 was invalidated.
Scott Armstrong. Summary of Bakorp Management Ltd. v. The Queen, 2013 TCC 94 under s. 169(2.1).
CRA considers that provincial ministries must comply with CRA information requirements
The Directorate considers that as Her Majesty in right of a province is a "person," a provincial ministry is bound by an information requirement under s. 231.2. No constitutional discussion.
Neal Armstrong. Summary of 19 December 2012 Memorandum 2012-0472761I7 under s. 231.2(1).
CRA accepts that dividends paid to a U.S. parent in Chapter 11 are beneficially owned by it rather than the creditors
A Canadian subsidiary which may have ceased operations but continued to earn income from securitization trusts including deferred purchase price, will pay cash dividends to its U.S. parent in the same (former) business, which is now managed by the Plan Administrator under a Chapter 11 Plan. The shareholder of the parent is an offshore fund whose members are unknown, so that it cannot be said that it is a qualifying person under Art. XXIX-A of the Treaty.
CRA ruled that the dividends will benefit from the Treaty-reduced withholding rate of 5% on the basis that the parent is the beneficial owner of the dividends (notwithstanding that in economic substance the dividends will be beneficially owned by the creditors) and that the rule in para. 3 of Art. XXIX-A is applicable, as the dividends will be derived by the parent "in connection with an active trade or business carried on in the United States that is substantial in relation to the activity in Canada that gave rise to the income." In addition to reflecting a look-through approach to characterizing the dividend as being business income, this approach is also consistent with domestic jurisprudence indicating that a virtual cessation of activity is required before a business can be considered to have ceased.
Neal Armstrong. Summary of 2012 Ruling 2012-0435211R3 under Treaties - Art. 29A.
Income Tax Severed Letters 10 April 2013
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Franchise Services braves Canadian exit tax in continuing to Delaware
Franchise Services of North America (FSNA) is merging with a private Delaware company (Adreca) in the same car rental business by continuing to Delaware, and then engaging in a triangular Delaware merger whereby the Adreca shareholder (Macquarie) receives 49.8% of its shares.
The disclosure does not make a huge deal out of the deemed disposition of FSNA's properties under s. 128.1(4)(b) or the potential withholding tax of sorts imposed under s. 219.1 (a.k.a., the emigration tax), so that it may be that no material exit tax is anticipated as a result of FSNA's substantial losses and what appears to be a relatively high paid-up capital for its shares. The Canadian tax disclosure also repeats, without further guidance, the anti-avoidance language in s. 219.3 indicating that the emigration tax of 25% will not be reduced to the Treaty rate of 5% if "it can reasonably be concluded that one of the main reasons that FSNA became resident in the U.S. was to reduce the emigration tax or Canadian withholding tax payable by FSNA."
Neal Armstrong. Summary of Franchise Services of North America Circular under Cross-Border Mergers - Outbound - Continuance and Merger.
CRA provides additional guidance on the foreign tax credit rules
The draft CRA folio on foreign tax credits incorporates most of the material in IT-270R3, but also adds some discussion. For example, it provides guidance on how the taxpayer is permitted to allocate allowable capital losses amongst different countries where the taxpayer’s global capital losses exceed its global capital gains for a year, and also notes, with respect to the "economic profit" rule (in s. 126(4.1)), that the rule is not applied independently to a related transaction involving another property acquisition.
Neal Armstrong. Summaries of S5-F2-C1: "Foreign Tax Credit" 27 March 2013 under ss. 126(1), 126(2), 126(4.1), 126(7) – business-income tax, 126(7) – non-business-income tax, 4(3), 110.5, 115(1)(a)(i) and 115(1)(a)(ii), and under General Concepts - Agency.
CRA finds that shares with a formula entitlement to corporate profits are taxable preferred shares.
CRA concluded that shares which were entitled to 75% of the profit resulting from an adventure in the nature of trade were taxable preferred shares on the basis that there was thus a limitation (to a maximum) of the amount of dividends to which they were entitled. This conclusion, although consistent with prior positions, is questionable, as such shares obviously were participating shares from any realistic perspective.
Neal Armstrong. Summary of 15 March 2012 T.I. 2012-0443471E5 under s. 248(1) – taxable preferred share.
CRA issues draft folio on price adjustment clauses
CRA’s draft folio on price adjustment clauses has dropped the (dead letter) requirement in IT-169 that the taxpayer notify CRA of the clause in its return.
CRA intimates that clauses adjusting the redemption value of shares avoid "technical difficulties" pertaining to clauses which instead purport to retroactively issue or cancel shares. However, an adjusting payment on a share with the first type of clause which has already been redeemed will result in an income inclusion to the redeemed shareholder under s. 84(3).
Price adjustment clauses "might" not work for butterfly purposes.
Neal Armstrong. Summary of 27 March 2013 S4-F3-C1 under General Concepts – Effective Date.
Income Tax Severed Letters 3 April 2013
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.