News of Note
MMV Capital – Tax Court of Canada finds no GAAR abuse in acquiring an approximate 100% interest in a Lossco but with no change of de jure control
Email this ContentA venture capital corporation (MMV Finance) acquired 49% of the voting common shares of a corporation (MMV) in interim bankruptcy proceedings and subscribed $1,000 for a large number of non-voting common shares giving it over 99.9% of all the common share equity. It then financed taking MMV out of bankruptcy proceedings at a modest cost, and transferred a loan portfolio of U.S.$86 million to MMV, effectively in consideration for debt and preferred shares, thereby reducing the equity interest of the arm’s length holders of 51% of the MMV common shares to less than 0.00001%.
Bocock J did not consider it to be a GAAR abuse for MMV to deduct its ample losses from the income generated by the loan portfolio, stating:
Parliament … deliberately kept the reference to de jure control in 111(5) instead of adopting a de facto standard. …
Evidence was not presented to show that the board did not have the actual authority to make material decisions on behalf of MMV. …
The presence of the longstanding, bright-line test of de jure control bears … witness to the rejection of applying the GAAR in the circumstances of this appeal as regards subsection 111(5).
Neal Armstrong. Summary of MMV Capital Partners Inc. v. The Queen, 2020 TCC 82 under s. 245(4).
Brown – Tax Court of Canada appears to find that wholly-owned corporations that currently could not legally pay dividends were a source of income for s. 20(1)(c) purposes
Wong J accepted that interest was deducible by an individual on personal lines of credit (mostly secured on one of his two homes) drawn down by him in order to fund construction, and substantial unexpected renovation work, on two prospective rental properties, or to repay loans from family and friends which initially had funded some of this work.
Although the decision describes the properties as if they were held by the taxpayer, it seems likely that they instead were held through two wholly owned corporations, with the taxpayer being treated in the books of account as having advanced the borrowed funds to the two corporations, presumably on a non-interest-bearing basis. Wong J stated that she did “not believe that either corporation would have met the statutory solvency test for payment of dividends.”
Thus, this case may support the proposition that money borrowed to make interest-free advances, to a wholly-owned corporation that has no current legal ability to pay dividends, can be deductible.
Neal Armstrong. Summaries of Brown v. The Queen, 2020 TCC 84 under s. 20(1)(c)(i) and s. 20(3).
CRA rules on pipeline implemented by the beneficiaries, not the estate
CRA has ruled on pipeline transactions that were to be implemented by the beneficiaries of the deceased rather than his estate. The shares of an investment portfolio company (Holdco) were held by the deceased and his two resident brothers, who were the legatees of his shares. The estate distributed the shares of the deceased to his two brothers shortly after his death.
The two brothers then formed a Newco, whose common shares were held equally by them, and transferred all their shares of Holdco to Newco on a s. 85(1) rollover basis in consideration for notes equal to their shares’ ACB and for preferred shares of Newco. Following a specified period of time (presumably a year), Holdco and Newco were to amalgamate, with the notes then being paid off by Amalco on a specified schedule.
The effect of these transactions is that the two brothers can extract all the ACB of their shares of Holdco (including for the shares previously held by them), not just the stepped up ACB that occurred on the death of their deceased brother. This is unstartling if their historical shares had the same ACB as their paid-up capital.
Neal Armstrong. Summary of 2020 Ruling 2020-0838951R3 F under s. 84(2).
Income Tax Severed Letters 12 August 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Joint Committee recommends that standby charges, consent fees and early consent bonuses paid to lenders be deemed to be Part XIII-exempt interest in light of Pangaea
The Joint Committee has recommended, in light of the broad textual approach taken in Pangaea as to what is a “restrictive covenant,” that the Act (perhaps s. 214(15)) be amended to treat payments of the following types of payments as payments of non-participating interest on the underlying debt, so that they would be more clearly exempt from Part XIII withholding:
- fees and charges (e.g., standby charges) payable by a borrower as consideration for the lender agreeing to lend money or make money available (arguably, under the definition of “restrictive covenant” such an agreement “affects … the … provision of property … by the taxpayer” (i.e., of funds by the lender) or “affects … the acquisition of property … by the taxpayer” (i.e., the lender’s acquisition of the debt obligation))
- consent payments to creditors, e.g., to permit a particular transaction or loosen a financial covenant (such “agreement could be viewed as affecting the (ongoing) provision of property by the taxpayer, being the loaned funds, especially if the consent relates to an amendment of a covenant that could otherwise have been breached and allowed … acceleration …”)
- in the context of a distress restructuring, an additional payment made to a debt holder who agrees to exchange for the securities of the restructured debtor by a specified date, e.g., the receipt of additional shares on a debt for shares restructuring (the additional shares “may properly be viewed as consideration for the debenture holder having agreed to consent to the restructuring plan by the specified date, rather than as consideration for the exchange itself, having regard to paragraph 68(c).”)
Neal Armstrong. Summary of “Impact of Pangaea Case,” 10 August 2020 Joint Committee Submission under s. 212(1)(i).
Addy – Federal Court of Australia, Full Court finds that the imposition of flat tax on UK working-holiday visa holders did not contravene the Treaty non-discrimination Article
The taxpayer, who was a British citizen aged 23, came to Australia on a “working visa” for a 20-month stint, during which period she was found by the Court to be a deemed Australian resident (based on her satisfying a 183-day presence test). A citizen and resident of Australia would have largely escaped income taxation on her modest income working on a horse farm and as a waiter due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of Pt. III of Sched. 7 of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.
The taxpayer, by virtue of her citizenship, was a UK rather than Australian national under the definition in the Australia-U.K. Treaty. That Treaty's non-discrimination clause (At. 25) - also found in many of the Canadian treaties - read:
Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.
In finding that this 15% tax did not contravene Art. 25, the majority of the Full Court found that “Art 25 is offended where the discrimination against the foreign national occurs solely by reason of having a different nationality,” whereas here, “it was not the taxpayer’s nationality that caused her to be taxed in accordance with Pt. III of Sch. 7 of the Rates Act, but rather her derivation of working holiday taxable income” (i.e,, as a British national, she could have applied for another type of visa, and not earned this income). Steward J further noted:
[T]he O.E.C.D. Commentary … warns against “unduly” extending the reach of Art. 24 of the Model Tax Convention (here Art. 25 of the Treaty) to “cover so-called “indirect” discrimination.”
Neal Armstrong. Summary of Commissioner of Taxation v Addy [2020] FCAFC 135 under Treaties – Income Tax Conventions – Art. 25.
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in April, 2010. Their descriptors and links appear below.
These are additions to our set of 1,241 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2010-04-23 | 22 December 2009 Internal T.I. 2009-0328141I7 F - 93(2) - Perte due à fluctuation de devises | Income Tax Act - Section 93 - Subsection 93(2.01) - Paragraph 93(2.01)(b) | relief under s. 93(2.01)(b) unavailable where matching FX gain is realized in a subsequent year |
| Income Tax Act - Section 93 - Subsection 93(2) | loss under s. 93(2) includes a loss wholly attributable to a fully-hedged FX loss | ||
| 2010-04-16 | 12 April 2010 External T.I. 2009-0327161E5 F - Revenu de location | General Concepts - Ownership | CRA can be bound by a counter letter rather than the apparent contract |
| Income Tax Act - Section 3 | notwithstanding Guide T4036, rental property can be rented at an arm’s length rent to related persons to generate losses if there is a source of income | ||
| 1 April 2010 Internal T.I. 2009-0352611I7 F - Redressement après le délai de prescription | Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) | statement of incorrect income amount for spouse for s. 118(1)(a) credit purposes is a misrepresentation – but CRA must establish that prudent person would not have so erred | |
| 6 April 2010 Internal T.I. 2009-0343091I7 F - Montant pour enfant | Income Tax Act - Section 118 - Subsection 118(4) - Paragraph 118(4)(b) | two separate parents with joint custody and separate residences can agree who claims which of their 3 children | |
| 9 April 2010 External T.I. 2010-0361381E5 F - Eligible Dividend | Income Tax Act - Section 89 - Subsection 89(14) | dividends declared separately can be separate dividends notwithstanding their payment by one cheque |
CRA provides pipeline rulings where the underlying operating business was sold for cash after the death and before the pipeline transactions
A died holding the shares of an Opco and of a portfolio company (Holdco). Following A’s death, the operating business of Opco was sold to a third party for cash, at which point CRA accepted that Opco started carrying on a portfolio business. Opco then engaged in preliminary transactions to push out its capital dividend account and access refundable tax balances by redeeming shares, which generated capital losses that the estate could carry back under s. 164(6). Opco and Holdco then amalgamated to form Opco 2.
CRA ruled on the implementation by the estate of conventional pipeline transactions for Opco 2 (whereby it sells Opco 2 to a Newco formed by it in consideration for a note and, at a subsequent juncture, Opco 2 and Newco amalgamate to form Amalco, and Amalco starts progressively paying off the note).
Neal Armstrong. Summaries of 2020 Ruling 2019-0824211R3 F under s. 84(2) and s. 51(1).
CRA follows its practice of requiring one year to pass before a pipeline note commences to be paid off
CRA ruled on conventional pipeline transactions for a portfolio holding company (Holdco). Unlike most recent rulings it did not redact the period of time between the sale of Holdco to Newco for a note, and the amalgamation of Newco with Holdco (it was stated as “one year” rather than “12 months,” so that there was no naughty number to redact).
Neal Armstrong. Summary of 2020 Ruling 2019-0832601R3 F under s. 84(2).
CRA finds that an NPO should have been charging GST/HST on sales of donated clothing
An NPO operated a store at which it sold used clothing that had been donated to it. Since it was not a registered charity, such sales were not exempted. The NPO had registered the store as a “small supplier division” but there ceased to be an exemption on that ground as a result of the sales exceeding $50,000. Accordingly, the NPO was a registrant (i.e., it was required to be registered for GST/HST purposes) and it thus was responsible for failure to charge GST/HST on the store sales.
Neal Armstrong. Summaries of 3 January 2020 GST/HST Ruling 192645a under ETA Sched. V, Pt. VI, s. 4 and s. 129.1(1).