News of Note
Mussalli – Federal Court of Australia finds that a partial rent prepayment was a capital expenditure
Email this ContentTwo Australian trusts that were to be the franchisees for seven McDonald’s restaurants agreed, at the same time as they agreed to enter into leases of the premises for base rents plus sales-based percentage rents, to make a lump sum “prepayment of rent” so as to reduce the percentage rent payable. With one relatively minor exception, the leases did not provide for any refund of the prepaid rent in the event of early lease termination.
The trusts deducted the rent prepayments over a 10-year period. In finding that the rent prepayments were capital expenditures, so that such deduction was not permitted, Jagot J stated:
[T]he payments … were … a one off, lump sum, non-refundable payment made to secure an enduring advantage (the right to pay the lesser percentage rent) for the term of the [leases] and most likely the term of any renewal of the [leases]. The payments negated or extinguished any obligation to pay the higher percentage rent and did not thereby relate to any future obligation to pay rent. As a matter of substance the payments, although called the prepayment of rent, did not involve the payment of rent at all. …
… What [the trust] acquired through the payments was a business with a different structure, a business in which the percentage rent payable was permanently reduced … .
… The non-refundable nature of the payments suggests that they were not made to secure the right to occupy the premises under the lease and, rather, were capital in nature.
Neal Armstrong. Summary of Mussalli v Commissioner of Taxation [2020] FCA 544 under s. 18(1)(b) – Capital expenditure v. expense – Contract purchases or prepayments.
CRA rules on an RCA trust that permits the retired employee to request an immediate payout on “a material deterioration in the Canadian economy”
CRA ruled that a new supplemental pension plan would qualify as a retirement compensation arrangement and that s. 207.6(7) would apply to the transfer from the old RCA trust to this new one (which would also entail CRA being asked to now hold the existing 50% refundable tax for the account of the new trust).
One of the features of the new plan was that, following the occurrence of a “Specified Event,” the retired “Participant” employee could request that the plan custodian pay out the property in the new RCA Trust and the resulting refundable tax that was generated. “Specified Event” was defined as the occurrence of:
(i) a significant health event or other emergency that … creates an unexpected change in financial circumstances and/or financial need, (ii) a material deterioration in the Canadian economy, (iii) a material change in personal income tax rates …, or (iv) any other event that could not have reasonably been foreseen by the Participant and creates an immediate need by the Participant for the use of funds held by the Trustee under the terms of the New RCA Trust.
In addition, "following material changes in the Canadian economy or the financial needs of the Participant or Participant’s family, [the Participant may] apply in writing to the Custodian to vary the amount of annual benefits."
Neal Armstrong. Summary of 2019 Ruling 2019-0803761R3 under s. 248(1) - retirement compensation arrangement.
Investment limited partnerships with offshore subs or Opco subs should consider making an ETA s. 225.4(6) election in order to potentially access ITCs
Most Canadian resident investment limited partnerships (ILPs) will be considered to be a selected listed financial institution (SLFI) for the 2019 year, thereby giving rise to an obligation to file a SLFI return by June 30, 2020.
In typical circumstances, unless an election is made under ETA s. 225.4(6) for s. 225.4(3) not to apply:
- ETA s. 225.4(3)(a) effectively deems non-resident unitholders of an ILP to be resident in Alberta for purposes of computing the blended rate of provincial tax to which the ILP is subject under the SLFI rules; and
- s. 225.4(3)(d) provides that the ILP is not entitled to claim input tax credits for an input that is not an “exclusive input” (e.g., for a supply of a management service that is “acquired” by the ILP for the purpose of both making a zero-rated financial-service supply to a non-resident subsidiary under Sched. VI, Pt. IX, s. 1, and for making exempt supplies of financial distributions to resident unitholders)
It is suggested that since “an ILP may undertake certain activities which allow it to claim ITCs, including making zero-rated supplies of financial services to non‑residents or, pursuant to proposed amendments to section 186 of the ETA, holding shares or debt in related corporations whose property (all or substantially all) was last acquired for use exclusively in a commercial activity,” consideration should be given to making the s. 225.4(6) election, so as to access or increase ITC claims (i.e., oust the second rule above).
Neal Armstrong. Summaries of PwC, Tax Insights: Investment limited partnerships ─ GST/HST & QST filing obligations, Issue 2020-27, May 04, 2020 under ETA s. 123(1) – ILP and s. 225.4(6).
CRA announces that it will accept the deferral of payments under a Bankruptcy proposal until September 1, 2020
S. 60(1.1) of the Bankruptcy and Insolvency Act effectively provides that unless Her Majesty consents, any court-approved proposal must provide for the payment of listed categories of amounts including those that could be subject to a demand under ITA s. 224(1.2) (i.e., source deductions). BIA s. 62.1(b)(ii) provides for waiver by the creditors of default in the performance of a proposal.
After acknowledging the COVID-19 outbreak, CRA announced:
The CRA is proposing a solution to assist taxpayers and LITs [Licensed Insolvency Trustees] in circumstances where the CRA is the majority creditor and the debtor is experiencing financial hardship.
For proposals filed under Division 1 of the … BIA … the CRA is offering a waiver of the default pursuant to section 62.1 of the BIA and granting a deferral of payments to the estate up to September 1, 2020. This will also apply to any amounts subject to section 60(1.1) of the BIA as per our existing Administrative Agreement policy with LITs.
For consumer proposals under the BIA, the CRA offers the acceptance of an amended proposal that calls for a deferral of payments up to September 1, 2020.
Neal Armstrong. Summaries of Pending Default of a Proposal under the BIA where the Canada Revenue Agency is a majority creditor: April 23, 2020 OSB Webpage under BIA s. 62.1(b)(ii) and ITA s. 224(1.2).
Toronto-Dominion Bank – Federal Court of Appeal finds that the deemed trust for unremitted GST defeated the Bank’s security interest on a voluntary sale of the mortgaged home
TD Bank made a mortgage loan to an individual who, unbeknownst to it, had unremitted GST collections. A year later, the individual sold his home and repaid the Bank in full. The Bank found out about the unremitted GST two years later when it received a payment demand from CRA.
Dawson JA agreed with Grammond J below that the Bank was required to pay the demanded amount by virtue of the deemed trust for the unremitted GST following the proceeds of the sale into the Bank’s hands by virtue of ETA s. 222(3). She recognized that First Vancouver had found that this deemed trust did not apply to “bona fide purchasers for value” of the tax debtor’s property (so that the trust attached to the sales proceeds rather than following the sold property) – but found that this exception did not apply to the payment of the sales proceeds to the Bank as a secured creditor. The Bank’s mortgage was not excluded as a “prescribed security interest” from the deemed trust rule because it was registered after the deemed trust arose in the tax debtor’s hands.
Respecting the implications of this decision, she stated:
[S]ecured lenders … may identify higher risk borrowers (which might include persons operating sole proprietorships), require borrowers to give evidence of tax compliance, or require borrowers to provide authorization to allow the lender to verify with the Canada Revenue Agency whether there are outstanding GST liabilities then known to the Agency.
She noted that ITA s. 227(4.1) was similar, except that the ITA deemed trust did not disappear in CCAA or bankruptcy proceedings.
Neal Armstrong. Summary of Canada v. Toronto-Dominion Bank, 2020 FCA 80 under ETA s. 222(3).
Income Tax Severed Letters 6 May 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
BMO – Federal Court of Appeal finds that former s. 39(2) extended to FX gains on s. 39(1) dispositions
On unwinding a tower structure, a Nevada subsidiary LP of BMO realized FX gains on repaying U.S.-dollar borrowings, but completely offset that loss through realizing a capital loss on winding up an NSULC subsidiary. As a technical matter, s. 112(3.1) did not apply to deny any portion of this capital loss because the NSULC paid all its dividends on a separate class of preferred shares that it had issued as a stock dividend – rather than on the common shares on which the LP had realized the loss.
CRA considered this structuring to be abusive and applied GAAR. Webb JA found that s. 112(3.1) would not have applied to grind the loss even if the NSULC had instead paid all the dividends on its common shares. Thus, the structuring was unnecessary, and there was no “tax benefit” which could engage GAAR.
In particular, he found that the pre-2013 version of s. 39(2) applied to FX gains or losses on the dispositions of property generally, rather than being restricted, as contended by the Crown, to dispositions of foreign currency and FX gains or losses arising on settlement of obligations. As s. 39(2) applied to the FX loss sustained on the disposition of the NSULC shares, s. 39(2) thus deemed that loss to be a loss from the disposition of foreign currency rather than of shares, so that s. 112(3.1) could not apply.
In this regard, he stated:
By providing that subsection 39(2) of the Act will be applicable “[n]otwithstanding subsection (1)”, Parliament acknowledged that both subsections 39(1) and (2) of the Act could apply to dispositions of property. If foreign currency was the only property to which subsection 39(2) of the Act was to have applied, the text of the provision could have so provided.
After referring to the Finance Technical Notes on ss. 39(2), 95(2)(f.15) and 95(2)(g.02), he further stated:
All of the Technical Notes released by the Department of Finance appear to be drafted on the premise that subsection 39(2) of the Act (as it read in 2010 and in earlier years) had a broader application than what is proposed by the Crown. The Technical Notes indicate that this version of subsection 39(2) of the Act applied to any disposition of capital property, and not just a disposition of foreign currency.
Neal Armstrong. Summaries of Canada v. Bank of Montreal 2020 FCA 82 under s. 39(2) and s. 112(3.1).
CRA rules that a simultaneous consolidation of 7 identical series of common shares into 1 series, and a stock split, did not effect a disposition
With a view to going public, a closely-held US corporation, whose issued and outstanding shares (which were taxable Canadian property and held by Canadian and US-resident corporate shareholders) consisted of seven series of common shares with identical attributes, proposed to amend its articles of incorporation so as to reclassify all the common shares into one series and to simultaneously effect a stock split. CRA ruled that this did not entail a disposition of the shares, so that no s. 116 certificate was required
Neal Armstrong. Summary of 2020 Ruling 2019-0799981R3 under s. 248(1) – disposition.
Athletes 4 Athletes Foundation – CRA is ordered to produce any irrelevant material (e.g., re other Foundations) that was before it when rejecting a registration request
The appellant Foundation appealed from the refusal of the Minister to register it as a Canadian amateur athletic association on the grounds inter alia that the Minister had considered “irrelevant information in comparing the [Foundation] to other applicants and existing registered CAAAs.” It sought an order under Rule 318(4) for further disclosure.
Laskin JA found that the Rules merely required the Minister to produce the documents which were in the hands of the decision-maker when the decision was made – and not to provide various other requested documents (e.g., the constating documents of all registered CAAAs at the time of the decision).
However, the affidavit of the CRA decision maker stated that “all relevant materials upon which the CRA relied … have been produced.” Laskin JA stated:
The affidavit evidence does not foreclose the possibility that the Minister used irrelevant material relating to the other entities.
He ordered the Minister “to produce any material apart from that already disclosed that was before her when the decision was made, with the exception of properly redacted information.”
Neal Armstrong. Summary of Athletes 4 Athletes Foundation v. Canada (National Revenue), 2020 FCA 41 under Rule 318(4).
6 more translated CRA interpretations are available
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in October and September, 2010. Their descriptors and links appear below.
These are additions to our set of 1,164 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for May.